Accountancy - It is Information providing Subject, which provides Financial Information

Financial Information includes

Financial Performance Profits or Lossess
Financial Position Assets and Liabilities

Goods Vs Fixed Assets - Nature of Business

Goods Item manufactured / purchased for the purpose of sale/resale (Goods are Part of Current Asse
Assets/FA Item manufactured / purchased for the purpose of use in business

Stock or Inventories Technical term of Goods

Types of Goods:
For Trading org Stock-in-Trade
For Manufacturing org
Raw Materials Held for production
WIP/SFG In the process of Production
Finished Goods Held for Sale
Consumables Consumed in the process of production
Others

For Service org Consumables Consumed in the process of rendering Services

Stock Levels at Points of Times

Closing Stock Stock at the end of the year - left out stock or balance stock
Opening Stock (Closing of
one year automatically
becomes Opening stock of
Next year)
Stock at the begining of the year

Business Set of activities carried on with the objective of earning Profits

Types:
a) Manufacturing
b) Trading
c) Service providing

Assets
Non Current Assets/Long Term Assets -Realised/Used for
more than 12 month

They are further classified into:

Fixed Assets (Tangible and Intangible)
Other NCA - for example Long Term Investments and Long Term Loans & Advances (given)
Capital Amount invested in the business by the owner
It can also be called as Equity or Networth
It is an Internal Liability
Capital Balance = Amt Invested + Profit or - Loss - Drawings

Drawings Withdrawal by the owner in the form of Cash or Kind

Trade Receivables
Debtors or Trade Debtors The Person from whom amount is receivable by business

Trade Payables
Creditors or Trade Creditors The Person to whom amount is payable by business

Liabilities
Inside Liabilities (Capital) Outside Liabilities - Amt payable to other than O
(Amt Payable to Owner) Non Current/Long Term Current/Short term
if it is payable beyond 12 months if it is payable within 12
 By Preparing Trading and Profit & Loss A/c ; P/L = Incomes - Expenses
By Preparing Balance Sheet

esale (Goods are Part of Current Assets)

of production

of rendering Services

r - left out stock or balance stock

Current Assets/Short Term Assets

-Realised/Used Within 12 months

CA Includes,
Current Investments
Inventories (Closing Stock)
Trade Receivables (Debtors & B/R)
Cash & Cash Equivalents (Cash & Bank)
 Short term Loans & Advances
Others

bilities - Amt payable to other than Owners

Current/Short term
months if it is payable within 12 months
Accounting Concepts or Principles or Conventions
1) Business Entity Concept
Business is different from Owner
Accounting is in the books of Business (point of view should be from Business)
Business is an Artificial Person
Transactions
Business Transactions Owner Personal Transactions
A Transaction where business is involved A Transaction where business is not involved
e.g. Purchase of Goods, Sale of Goods, etc e.g. Jewellery for personal use, payment of personal exp by o
Capital introduced, Drawings, additional capital,
Personal expenses of owner paid by business etc

Only Business Transactions should be recorded in the books of business

2) Money Measurement Concept

Only those transactions which can be measured in terms of money should be recorded (Financial Transactions)
Types of Business Transactions
Financial Transactions - Recorded - Those Transactions which can be expressed in terms of money
Non-Financial Transactions - Will not be recorded - Those Transactions which cannot be expressed in terms of money. E

Books of Accounts (BOA) will be maintained in Money Terms - In Currency - In Currency of Country where BOA are main
e.g. if BOA are maintained at New york, BOA should be maintained in US$
Books of Accounts (BOA) includes:
a) Journal or Subsidiary Books
b) Ledger

Money Value keeps on changing - Such change in Money value should not be considered
1-Jan Goods Purchased Rs. 10,000
31-Dec in computing performance, Purchases shall be taken

3) Periodicity Concept
Business is an Artificial Person - Never Ending life - Performance for what period and Position at what POT?
Infinite life of business is divided in to small Clusters/Parts - Each part/Cluster is equal to 12months
Hence Performance should be computed atleast for every 12 months and Position should be disclosed at the end of 12

Accrual Concept (One of the Fundamental Accounting Assumptions) / Merchantile basis for maintainence of Books
4) the fundamental Accounting Assumptions)
Expenses Incomes/Revenues
Recorded whenever it is Incurred Recorded whenever it is Earned
Incurred - Liable/Obligation to Pay it Earned - Right to Receive

June Salary 10,000 - Liable to pay is on 30/6 (Incurred) Interest/Rent Income - 1000 - Right to Receive on 30/6
Paid on 5/7 (Liability is settled) Received on 5/7
Salary Expense should be recorded on 30/6 Income should be recorded on 30/6
 June month salary is paid in advance - Paid on 10/6
Salary Exp should be recorded on 30/6 (Incurred)
for 20 days this salary is called as
Prepaid Salary / Advance Salary - Asset (Current Asset)
Received on 5/6
Income should be recorded on 30/6
for 25days - Income Received in Advance - Liab
(Service is yet to be provided for 25 days, busine
liable to Provide service and hence it is Liab

Expense - Considered for calculation of Profit/Loss (Performance) Income - Considered for calculation of Profit/
Outstanding Expense / Expense Payable / Arrears (Liability) Accrued/Outstanding Income / Income Recei
Prepaid Expense / Expense paid in Advance (Asset) Income Received in Advance (Liability)

Note: Cash Basis of Maintainence of BOA

Expenses should be recorded whenever it is paid…there is no concept of Outstanding / Prepaid Exp
Incomes should be recorded whenever it is received…there is no concept of Accrued / Income received in Adv

5) Matching Concept
All expenses matched with the revenue of that period should only be considered
If any Revenue is recognised then expenses incurred to earn that revenue should also be recorded in same Accountin
 s not involved
e, payment of personal exp by owner etc

Financial Transactions)

expressed in terms of money. E.g. Efficeincy/Loyalty of employees

of Country where BOA are maintained

mance, Purchases shall be taken as same Rs. 10,000

ition at what POT?

d be disclosed at the end of 12 months.

sis for maintainence of Books of Accounts - (One of

tions)
mes/Revenues
enever it is Earned
Right to Receive

1000 - Right to Receive on 30/6 (Earned)

Received on 5/7
orded on 30/6
 e recorded on 30/6
ome Received in Advance - Liability
be provided for 25 days, business is
vide service and hence it is Liability)

dered for calculation of Profit/Loss (Performance)

anding Income / Income Receivable (Asset)
ved in Advance (Liability)

anding / Prepaid Exp

ccrued / Income received in Advance

be recorded in same Accounting year

6) Cost Concept

7) Going Concern Concept (One of the Fundamental Accounting Assumptions)

8) Realisation Concept

9) Prudence

10) Conservatism

11) Consistency (One of the fundamental Accounting Assumptions)

12) Substance Over Form

13) Materiality

14) Full Disclosure

15) Dual Aspect Concept - Will be discussed in more detail just before starting of Journal

Fundamental Accounting Assumptions

1 Going Concern
2 Consistency
3 Accrual

Any user while reading FS, they should assume that all the above three are followed by Entity, unless otherwise spe
mentioned that they are not followed
If they are followed - there is no need to disclose in FS that they are followed
If they are not followed - the fact that they are not followed and reason behind it should be disclosed
 Asset(Fixed Asset) should be recorded at Cost Price
Cost - To get Something what is Sacrificed
However when FA is carried forward from one year to another by disclosing in Balance sheet, it can be disclosed at Cost Less D

n Concept (One of the Fundamental Accounting Assumptions)

Financial Statements will be prepared on the Assumption of Going concern
Going Concern - Business will continue for Foreseeable Future
Foreseeable future - How many years? - It depends on Nature of Business
for example Manufacturing Org - 5 years
Software org - 3 years

Going Concern is Satisfied - Cost Concept Should be followed - All Assets in

Balance sheet should be disclosed at Cost price(Less Depreciation if any) -
Fluctuations(Increased/Decreased) in value of Assets should be ignored
Going Concern is not Satisfied - Cost Concept Should not be followed - All
Assets in the B/S should be disclosed at Realisation Value(Estimated Selling
price or Net Realisable Value). Profit or loss on conversion of A&L from Cost to
NRV, should be considered in calculation of Performance.

Only record Realised Profits Land

Unrealised profits should not recorded Today MV
Profit
Land is Sold?
Sold
Record Profit
Realised Profit

In Uncertain situations/Circumstances (Future) - Estimation is allowed

Prudence gives right to make estimations and record the same.

Estimation of Future Events- Result

Expected/Estimated/Future Profits Expected/Estimated/Future Lossess
Ignore it It should be recorded immediately
Should not be recorded

One of the fundamental Accounting Assumptions)

Accounting Policies should be followed consistently from one period to another period
e.g. Method of providing Depreciation (Straight Line method)

Importance should be given Substance of transaction over its Legal form

Year Ending date is 31/12/2020
A sold Land to B for Rs 10 Lakhs on 25/12/2020 through a Sale Agreement
Land is registered on 10/1/2021
As on 31/12/2020 (After Sale, but before registration) in whose BOA Land should be recorded as an Asset??
 As on 31/12/2020, Legal owner is A, however B is Substantial Owner
B should record it as an Asset as on 31/12/2020

If an Amount is Immaterial , ignoring all the other concepts it can be recorded at Convinience of Business

Material Amount - Any Amount which affects economic decision making of the User
Immaterial Amount - Any Amount which does not affects economic decision making of the User

Material Amt depends on level and nature of Business

e.g. RIL Purchased Calculator of Rs. 200, Useful life of Calculator is 3 years
Capital Exp? - Calculator recorded as Fixed Asset and it will be depreciated over 3 years
Revenue Exp? - Cost of Calculator will charged for Computing CY Profit/Loss

Since Rs 200 is immaterial to RIL, they need not to record it as Capex, they can treat it as revenue Exp.

e.g. Most of large org, will have an Accounting Policy in regard to Capex
Any Asset purchased for less than Rs 50,000, they can be treated as Revenue Exp.

Every Financial information should be disclosed in the Financial Statements with adequate information if required disclose und

oncept - Will be discussed in more detail just before starting of Journal

Assumptions

reading FS, they should assume that all the above three are followed by Entity, unless otherwise specifically
at they are not followed
owed - there is no need to disclose in FS that they are followed
followed - the fact that they are not followed and reason behind it should be disclosed
can be disclosed at Cost Less Depreciation if any

100 B/S
150
50 ?Record
Land is Sold?
Unsold
Profit should not be recorded
Unrealised profit

s an Asset??
mation if required disclose under Notes to Accounts
Users of Financial Information (Stakeholders)
Users Purpose
Management For day-to-day decision-making and performance evaluation.
To analyse performance, profitability and financial position.
Proprietor / Shareholders
(Owners) Note: Prospective investors are interested in the track record of the
Company.
Lenders - Banks & Fin. To determine the financial position and strength of the Company,
Institutions Debt Service Coverage, etc.
Suppliers To determine the credit worthiness of the Company.
To know general business viability before entering into long-term
Customers
contracts and arrangements.
To know the stability, continuity and growth of the enterprise, and
Employees its ability to pay remuneration, retirement & other benefits, and to
enhance career opportunities.
(i) To ensure prompt collection of Direct and Indirect Tax
revenues,
Government
(ii) To evaluate performance and contribution to social
objectives.
Research Scholars For study, research and analysis purposes.
To see whether the enterprise is making a reasonable / substantial
Public at Large contribution to the local economy, e.g. employment opportunities,
patronage of local suppliers.
 Accounting Policies
All the below are as per AS 1: Disclosure of Accounting Policies

Accounting Policies
It is a specific Accounting Principle and method of
application of such principle in preparation and
presentation of Financial Statements
e.g. Providing depreciation on P&M under SLM

List of all significant Accounting Policies should be disclosed under Financial Statements

Selection and Application of Accounting Policies

Two Criterias Primary - True and Fair View
Such Selected Accounting Policy should reflect True
and Fair view of Business Operations on the
Financial Statements
e.g. P&M is being Used in Business for production of
Goods, on which Depreciation should be provided,
Which Method?
Depreciation should be matched with
Benefits(Estimated) from P&M (Matching Concept)
for example, Benefits are same through out useful
life of P&M - Depreciation should also be same
through out useful life - SLM
another example - Benefits are decreasing through
out useful life of P&M - Depreciation should also be
decreasing through out useful life - WDV

Secondary - a) Prudence
b) Substance over Form
c) Materiality

Changes in Accounting Policies

Consistency An Entity should follow same Accounting Policies from one period to other

Still we can change Accounting Policies, but the fact that it is changed should be disclosed

A change in Accounitng Policy can be done in any of the following Situations:

a) It is required by any Statute(Law/Act) or
b) to comply with an Accounting Standard or
c) Change would result in more appropriate presenation of FS
be disclosed
UNIT 4: Capital and Revenue
I) Capital and Revenue Expenditures
1) Capital Expenditure
It is an expenditure incurred for the purpose of -
(a) Purchase / Creation / Improvement of Fixed
Assets or (Purpose)
(b) Expenses necessary for the above purchase /
Creation (Purpose) and
(c) Increasing the earning capacity of the business.
(Future Economic Benefits)

To call an Expenditure as Capital Exp, it should satisfy

Purpose (a or b) and Benefits (c)

Improvement Vs Repairs
If Benefits are increased - Improvement - Capex
If Benefits are maintained at same level - Repairs

Repairs
On the Asset before using it - Capex (When Old or Used Assets are Purchased)
On the Asset while using it - Rev. Exp

If Question is silent about time of repairs, it should be assumed as while using it and it

Revenue Expenditure If it is not a Capital Expenditure

Note:
All Expenses incurred to bring the Asset for working condition (Until the Asset is Ready for use) are Capex.
Any Exp incurred once the Asset is ready for use are Rev Exp.

Requirement for Distinguishment?

Entire Revenue Exp incurred in a year shall be deducted for computing Profit/Loss (Performance - Trading and P&L A/c)
Where as, a part of Capital exp in only to be considered for computing Profit/Loss,which is called as Depreciation (Reduction in
Total Capital Exp is allocated among the Useful life of the Asset.

Deferred Revenue Expenditure Deferring Revenue Expenditure

Delaying the charge to compute Performance (P&L)
It is a Ficticious Asset

e.g. Huge Advertisement Exp incurred for launch of a product

Advertisement Exp - Revenue Exp - Generally such rev
exp should be charged to P&L immediately in the year
when it is incurred
 However an Entity can prefer(Option) to charge it to
P&L over number of years. For example an entity can
charge Adv exp of RS. 10 crores over a period of 5 years
- Adv exp is called as Deferred Revenue Exp

II) Receipts
1) Revenue Receipts Amounts received in the normal course of business activities
2) Capital Receipts Receipts which are not Revenue Receipts

Fixed Asset
Sale Proceeds 92,000
Less: Cost or BV -90,000
Profit 2,000
Net amount is considered

Goods
Sale Proceeds 92,000
Less: Cost -90,000
Profit 2,000
Gross Amounts are considered
sets are Purchased)

med as while using it and it is revenue Exp

Trading and P&L A/c)

as Depreciation (Reduction in value of Asset)
 Capital Receipt
Capital Expenditure
Profit - Will be considered as Indirect Income for Calculating Performance - Credited to P&L A/c
et amount is considered

Revenue Receipt - Will be considered as direct Income for Calculating Performance - Credited to Trading A/c
Revenue Expenditure - Will be considered as Direct Expense for Calculating Performance - Debited to Trading A/c
Profit - Need not to be considered separately
oss Amounts are considered
 Trading A/c
ed to Trading A/c
UNIT V: Contingent Assets and Contingent Liabilities (As per AS 29)

Provisions
Against Assets (AS 4) (Loss)
E.g. Provision for Depreciation

Provision for Baddebts

Customer Mr. A, from whom 10,000 is receivable - Doubt about receipt of
Amt (Future Loss)

Future loss should be recorded today - Conservatism concept

This loss will be recorded in the form of Provision (Estimation)

It will be Charged for computing Performance as Provision for Baddebts

Provision against Assets will not be disclosed under Liabilities side, they will
be disclosed as deduction from respective assets on Assets side (Prov for
Dep will be deducted from PPE, Prov for Baddebts will be deducted from
Debtors)

Accounting Treatment as per AS 29

Particulars
Provisions (for Expenses - As per AS 29)

Contingent Liabilities

Contingent Assets

All the above three are related to future and are estimations

Provisions Vs Contingent Liabilities

If all the below three conditions are satisfied it is a Provision,
1) Present obligation is available as a result of an Obligating Event
2) Outflow of Resources is Probable
3) Relaible Estimation can be done

If any of the above Conditions are not satisfied, then it is a Contingent Liability
visions
For Expenses (AS 29) (Payable to Outsiders)
Tax Expense which is on CY Profits will be paid in NY
CY Profits are 10,00,000 and Tax rate is 30%, Tax
expense of CY is 300,000 (Estimation) will be paid in NY

It will be recorded in CY based on Accrual/Matching

concept as Provision for Taxation and it will be charged
for computing performance (Debited to P&L A/c)

It will be Charged for computing Performance as

Provision for Baddebts

Provision for Expenses will be disclosed under Liabilities

side of Balance sheet

Accounting Treatment
Charged for computing Performance and disclosed
under Liabilities side of Balance sheet

It will not be recorded/accounted (JE will not be

recorded), it should be disclosed as part of Notes to
Accounts (Foot Notes - They are part of Financial
Statements)
It should be ignored - No accounting/Disclosure.
However if management wants, it can be disclosed
under Directors Report (this DR is not part of Financial
Statements)

gent Liability
Unit 8: Accounting Standards

Objectives of AS

Benefits of AS

Limitations of AS
Formulation - Refer Word Document

List of AS

Number of the
Accounting
Standard (AS)

AS 1
AS 2 (Revised)
AS 3 (Revised)
AS 4 (Revised)
AS 5 (Revised)
AS 6 (withdrawn
pursuant to
issuance of AS 10)
AS 7 (Revised)
AS 8 (withdrawn
pursuant to AS 26
becoming
mandatory)
AS 9
AS 10
AS 11 (Revised)
AS 12
AS 13
AS 14
AS 15 (Revised)
AS 16
AS 17
AS 18
AS 19
AS 20
AS 21
AS 22
AS 23

AS 24
AS 25
AS 26
AS 27
AS 28
AS 29

* Note: The list of accounting standards given above does not form part of syllabus. It has been given here for the
knowledge of students only.
ccounting Standards
"Accounting Standards (AS)" represents the statements issued by the Institute of Chartered of
Accountants of India (ICAI), which contain basic principles for Accounting / disclosure for specific items in
the Financial Statements.

At the international level, these accounting Standards are called as "International Accounting Standards
(IAS) / International Financial Reporting Standards (IFRS)". Such standards are set up by the
International Accounting Standards Committee (IASC).

The Accounting Standards Board (ASB) of the ICAI is responsible for identification and issue of
Accounting Standards.

The whole idea of accounting standards is centered around harmonisation of accounting policies and
practices followed by different business entities so that the diverse accounting practices adopted for
various aspects of accounting can be standardised. Accounting Standards standardise diverse accounting
policies with a view to:
(i) eliminate the non-comparability of financial statements and thereby improving the reliability of
financial statements; and
(ii) provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards reduce the accounting alternatives in the preparation of financial statements
within the bounds of rationality, thereby ensuring comparability of financial statements of different
enterprises.

Accounting standards seek to describe the accounting principles, the valuation techniques and the
methods of a pplying the accounting principles in the preparation and presentation of financial
statements so that they may give a true and fair view. By setting the accounting standards, the
accountant has following benefits:

(i) Standardisation of alternative accounting treatments: Standards reduce to a reasonable extent or

eliminate altogether confusing variations in the accounting treatments used to prepare financial
statements.

(ii) Requirements for additional disclosures: There are certain areas where important information are
not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.

(iii) Comparability of financial statements: The application of accounting standards would, to a limited
extent, facilitate comparison of financial statements of companies situated in different parts of the
world and also of different companies situated in the same country. However, it should be noted in this
respect that differences in the institutions, traditions and legal systems from one country to another
give rise to differences in accounting standards adopted in different countries.

However, there are some limitations of accounting standards:

 (i) Difficulties in making choice between different treatments: Alternative solutions to certain
accounting problems may each have arguments to recommend them. Therefore, the choice between
different alternative accounting treatments may become difficult.
(ii) Restricted scope: Accounting standards cannot override the statute. The standards are required to be
framed within the ambit of prevailing statutes.

tion - Refer Word Document

Title of the Accounting Standard

Disclosure of Accounting Policies

Valuation of Inventories
Cash Flow Statements
Contingencies and Events Occurring after the Balance Sheet Date
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Depreciation Accounting

Accounting for Construction Contracts

Accounting for Research and Development

Revenue Recognition
Property, Plant and Equipment
The Effects of Changes in Foreign Exchange Rates
Accounting for Government Grants
Accounting for Investments
Accounting for Amalgamations
Employee Benefits
Borrowing Costs
Segment Reporting
Related Party Disclosures
Leases
Earnings Per Share
Consolidated Financial Statements
Accounting for Taxes on Income
Accounting for Investments in Associates in Consolidated Financial Statements

Discontinuing Operations
 Interim Financial Reporting
Intangible Assets
Financial Reporting of Interests in Joint Ventures
Impairment of Assets
Provisions, Contingent Liabilities & Contingent Assets

he list of accounting standards given above does not form part of syllabus. It has been given here for the
ge of students only.
IAS
IFRS
UNIT - 9: Ind AS
UNIT - 9: Ind AS
Two sets of Standards are available in India
1. Accounting Standards (AS) - Unit 8, is the series which are covered at Foundation(Specifically not covered), Inter
and Final Level
2. Indian Accounting Standards (Ind AS) - Unit 9, is the series which are covered only at Final Level

What are Ind AS?

IFRS Converged Standards

What are IFRS?

They are standards by IASC/IASB based in London (75 Countries Bodies are members)
The standards which are issued by IASC are called as International Accounting Standards (IAS)
After formation of IASB, the standards which are newly issued by IASB are called as International Financial Reporting Standard
Right now, IFRS includes IAS also. IFRS series is an extention of IAS

Need of Ind AS?

Global Village/Economy

AS vs Ind AS vs IFRS
Inventories
 Applicable to other than Companies
Applicable mainly to Companies

IASC - IAS
IASB - IFRS

ial Reporting Standards (IFRS)

40 IAS
increasing the list under name of IFRS

US Co. US GAAP
Indian Co. AS

Converged IFRS
Ind AS - Converged IFRS
US - Converged IFRS

US Co. Converged IFRS

Indian Co. Converged IFRS
 Unit 7- Accounting as a measurement Discipline

I Elements of a Measurement Discipline

The three elements of Measurement Discipline and how Accounting satisfies these elements are as under
Element / Condition
1. Identification of objects or
events to be measured.

2. Selection of Standard or
Scale to be used.

3. Evaluation of dimension
of measurement standard
Conclusion: However, Accounting is not an exact measurement discipline because accounting
measures information mostly in money terms which is - (a) not a stable scale (b) Not having universal
applicability and (c) not stable in dimension for comparison over time.

II Measurement Bases in Accounting

The measurement bases or valuation principles used in Accounting are -
Base

1. Historical Cost

2. Current Cost (used under

AS 2)

3. Realisable Value
(Inventories (AS 2) of
Foundation)

4. Present Value (used

under AS 10)

Note: Different measurement bases, like Historical Cost / Current Costs / Net Realisable Value / Presen
situational needs) to depict true and fair view of the financial position of t

III Accounting Estimates

(a) Meaning: "Accounting Estimate"
means of measurement.
(b) Examples: Depreciation - In this case, useful life or Scrap Value of the asset is Estimation
 Unit 7- Accounting as a measurement Discipline

asurement Discipline
s of Measurement Discipline and how Accounting satisfies these elements are as under -
Does Accounting satisfy the condition?
Financial Transactions and Events are measured in Accounting. Non-
financial transactions, however significant, are not considered.
The ruling currency of the country is used as the basis of money
measurement, in Accounting. However -
(a) Money is not a stable scale having universal applicability.
(b) Exchange Rates between different currencies are not
constant.
Money, as a valuation base, loses its value over period time. Hence, it is
not stable in the dimension.
owever, Accounting is not an exact measurement discipline because accounting
tion mostly in money terms which is - (a) not a stable scale (b) Not having universal
plicability and (c) not stable in dimension for comparison over time.

es in Accounting
bases or valuation principles used in Accounting are -
Valuation Rule for
Assets

Cash or Cash Equivalent paid, or Fair Value of the Asset at the time of
acquisition.

Cash or Cash Equivalent which is to be paid if the same or an equivalent

asset was acquired currently. (PURCHASE ANGLE)

Cash or Cash Equivalent that could currently be obtained by selling the

assets in an orderly disposal. (SALE ANGLE)

Present Discounted Value of Cash Inflows expected to be derived from

such asset over its useful life.

measurement bases, like Historical Cost / Current Costs / Net Realisable Value / Present Value, are used according to suitability
situational needs) to depict true and fair view of the financial position of the reporting entity.

ning: "Accounting Estimate" means an approximation of the amount of an item in the

measurement.
amples: Depreciation - In this case, useful life or Scrap Value of the asset is Estimation
s are as under -

on Rule for
Liabilities
Proceeds received in exchange for the obligation
(Bank Loan), or the amount of cash / cash equivalent
expected to be paid to satisfy it in the normal course
of business(Credit Purchase of Goods).

Undiscounted amounts of Cash and Cash Equivalent

that would be required to settle the obligation
currently.

Undiscounted amounts of Cash and Cash Equivalent

that would be required to settle the obligation in the
normal course of business.

Present Discounted Value of Cash Outflows expected

to be required to settle the liabilities in the normal
course of business.
Value / Present Value, are used according to suitability (i.e. the
al position of the reporting entity.

n item in the absence of a precise

is Estimation
Quantity of stock

Kg's
100kgs

Rs. 100,000
Unit 1: Meaning and Scope of Accounting

A) Definition of Accounting

B) Procedural Aspects of Accounting

I)

II)

Generating Financial Information

Recording:

Classifying:

Summarizing:

Using the Financial Information

Analysis :

Interpreting:

Communicating:

C) Objectives of Accounting

D) Functions of Accounting
Unit 1: Meaning and Scope of Accounting

A) Definition of Accounting
1. As per the American Institute of Certified Public Accountants (AICPA) - Accounting is an art of
recording, classifying and summarizing transactions and events which are in part atleast of financial character,
in a significant manner and in terms of money, and interpreting the results thereof.
2. Accounting also involves analyzing and interpreting the financial transactions and communicating the
results to the persons interested in such information (Users of FS - Stakeholders)
3. Accounting is considered as an 'Information System', as the function of Accounting is to provide qualitative
information, primarily financial in nature about the business organisation.

B) Procedural Aspects of Accounting

From the above definition, procedure of accounting can be divided in to two parts:
Generating Financial Information
1. Recording
2. Classifying
3. Summarizing

Using the Financial Information

1. Analysing
2. Interpreting
3. Communicating

Generating Financial Information

Recording:
All business transactions which are of financial nature (i.e. expressed in terms of money) are recorded in the
books of accounts.

Classifying:
Classifying involves grouping transactions of a similar nature at one place, such that information will be
compressed and presented in useable form.

Books of Accounts:
Journal - All Financial Transactions will be recorded in a Book called as Journal (Primary Book or First Book)
Ledger - Recorded information in Journal is further classified in a book called as Ledger (Secondary and Final Book)

Summarizing:
This involves presentation and preparation of the classified information in a manner useful to the internal and
external users of Financial Statements.
It involves preparation of Trial Balance (Summary of Ledger), and Financial Statements there from, viz. (i)
Trading & Profit and Loss Account (used to find out profits / losses for the business), (ii) Balance Sheet (used to
ascertain the financial position, Assets and Liabilities), and (iii) Cash Flow Statement (used to determine the
factors for increase or decrease in cash & bank balances)

Using the Financial Information

 Analysis involves methodical classification of the data given in the Financial Statements.
Analysis is concerned with the determining the relationship between the items in the Profit and Loss Account
and Balance Sheet (i.e. Ratio Analysis). Thus, it provides the basis for interpretation.
Further, analysis involves comparing current year figures with the previous year figures

Interpreting:
Drawing observations from the items in the financial statements and also from relationships determined in
analyzing process
Financial Statements are interpreted to explain what had happened, why it had happened and what is likely to
happen under specified conditions.
Based on analysed information, interpretation shall be done.

Communicating:
It is concerned with the transmission (Sharing) of summarised, analysed and interpreted information to the end
user (Stakeholders) to enable them to make rational decisions.

C) Objectives of Accounting
1. Systematic recording and classifying of all business transactions - Book-Keeping, i.e. Journal,
Ledger and Trial Balance

2. Ascertainment of result of business operation - Performance through preparation of Trading and P & L Account
3. Ascertainment of financial position - Through preparation of Balance sheet
4. Providing information to Users - Financial information is communcated in the form of Financial Statements and Reports

D) Functions of Accounting
1. Measurement: Accounting measures the performance of the business entity and depicts its current
financial position.
2. Forecasting: Accounting helps in forecasting (estimating) future performance and financial position of
enterprise using past data.
3. Decision-making: Accounting provides relevant information to the Users of accounts to aid rational
decision-making.
4. Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and
discloses information regarding accounting policies and Contingent Liabilities, which play an important role in
predicting, comparing and evaluating the financial results.
5. Control: Accounting identifies weaknesses in the operational system and provides feedback regarding
effectiveness of measures to rectify such weaknesses.
6. Government Regulation and Taxation: Accounting provides necessary information to the Government,
to exercise control on the entity as well as in collection of direct and indirect tax revenues.
d Final Book)
& L Account

ements and Reports

E) Book-Keeping Vs Accounting

S. No.
1
2
3

SUB-FIELDS OF ACCOUNTING
F) Relationship of Accounting with other Disciplines
Discipline

1. Auditing

2. Economics

3. Law

4. Mathematics

5. Management

6. Statistics

G) Services of a CA/CMA
ng Vs Accounting
Accounting is a broad subject. It calls for a greater understanding of records obtained from book-keeping
and an ability to analyse and interpret the information provided by book-keeping records. Book-keeping is the recording
phase while accounting is concerned with the summarising phase of an accounting system. Book-keeping provides
necessary data for accounting and accounting starts where book-keeping ends.

Book-keeping
It is a process concerned with recording of transactions. (Recording and Classifying)
It constitutes as a base for accounting.
Financial statements do not form part of this process.

Managerial decisions cannot be taken with the help of these records.

There is no sub-field of book-keeping.

Financial position of the business cannot be ascertained through book-keeping records.

Book-keeping
Journal
Ledger
Trial Balance (Summary of Ledger)

-FIELDS OF ACCOUNTING
The various sub-fields of accounting are:
(i) Financial Accounting – It covers the preparation and interpretation of financial statements
and communication to the users of accounts. It is historical in nature as it records transactions
which had already been occurred. The final step of financial accounting is the preparation of
Profit and Loss Account and the Balance Sheet. It primarily helps in determination of the net
result for an accounting period and the financial position as on the given date.

(ii) Management Accounting – It is concerned with internal reporting to the managers of a

business unit. To discharge the functions of stewardship, planning, control and decision-
making, the management needs variety of information. The different ways of grouping
information and preparing reports as desired by managers for discharging their functions are
referred to as management accounting. A very important component of the management
accounting is cost accounting which deals with cost ascertainment and cost control.
Management Accounting will be dealt with at higher levels of the Chartered Accountancy
Course.
(iii) Cost Accounting – The terminology of Cost Accounting published by the Institute of Cost
and Management Accountants of England defines cost accounting as:
“the process of accounting for cost which begins with the recording of income and expenditure
or the bases on which they are calculated and ends with the preparation of periodical
statements and reports for ascertaining and controlling costs.”
 (iv) Social Responsibility Accounting – The demand for social responsibility accounting stems
from increasing social awareness about the undesirable by-products of economic activities. As
already discussed earlier, social responsibility accounting is concerned with accounting for social
costs incurred by the enterprise and social benefits created.

(v) Human Resource Accounting – Human resource accounting is an attempt to identify,

quantify and report investments made in human resources of an organisation that are not
presently accounted for under conventional accounting practice.

of Accounting with other Disciplines

Relationship
Auditing process reviews the Financial Statements, which are the outcome of the accounting
process. Thus, The Auditor should have a thorough and sound knowledge of Accounting
Standards and Generally Accepted Accounting Principles for reviewing the Financial Statements.
1. Economics uses the database provided by Accounting System, for developing decision-models
and for rational decision-making on the use of scarce resources. ,
2. Economic Theories have influenced the development of decision-making tools used in
accounting.
3. However, there are differences between the Economists' and Accountants' concepts of
Income, Capital and Valuation of Assets.
· Transactions and events are governed by the laws of the land like the law of Contracts,
Sale of Goods, Negotiable Instruments and Taxation Laws.
· The entity itself is governed by specific statutes like Partnership Act, Companies Act, Co-
operative Societies Act, which have a bearing on maintenance of account books.
· The format of Financial Statements is also prescribed by certain Statutes like Companies
Act, Banking Regulation Act, etc.
· Also, accounting influences law in the sense that legislation about accounting system
cannot be enacted unless there is a corresponding development in the accounting discipline,
e.g. formulation of Accounting Standards and adoption by Companies Act.

· Knowledge of arithmetic and algebra is a pre-requisite for accounting computations and

measurements, e.g. Depreciation, Use of interest and annuity tables, Lease Rentals, Hire
Purchase Instalments, etc.
· Ratios, Graphs, and Operations Research Models have been widely used in accounting
Management relies on accounting and other data for effective decision-making. Accounting
System can be designed to serve management purposes.
In accounting, many ratios and financial calculations are based on statistical methods, which
help in averaging them over a period of time. Thus, Statistics is helpful in development of
accounting data and in their interpretation, using Pie-Charts, Graphs and Trend Curve Diagrams,
etc.

1. Accounting Services

· Maintenance of Books of accounts

· Preparation of Financial Statements

· Interpretation of Financial Statements

 from book-keeping
ords. Book-keeping is the recording
ystem. Book-keeping provides

Accounting
It is a process concerned with summarising of the
recorded transactions.
It is considered as a language of the business.
Financial statements are prepared in this process on
the basis of book-keeping records.
Management takes decisions on the basis of these
records.
It has several sub-fields like financial accounting,
management accounting etc.
Financial position of the business is ascertained on the
basis of the accounting reports.

Accounting
Financial Statements
 2. Audit Services 3. Consultancy Services

· Taxation Consultancy
· Statutory Audit
(Direct & Indirect Taxes)
 · Corporate Laws
· Internal Audit
Consultancy

· Limited Review · Management Consultancy

· Due Diligence Audit
· Investigation
 4. Other Services
· Financial Advisory Services,
e.g. Investment, Insurance,
Business Expansion, etc.
· Specific Services, e.g.
Secretarial, Share Registration,
formation / liquidation of
companies etc.
Chapter 2: Accounting Process
Unit 1 Journal
Unit 2 Ledger
Unit 3 Trail Balance
Unit 4 Subsidiary Books
Unit 5 Cash Book
Unit 6 Rectification of Errors

Unit 1 Journal

Dual Aspect Concept

In each Financial Transaction identify atleast Two Aspects and they are called
as Debit Aspect and the other is called as Credit Aspect

For every Debit there is corresponding Credit or vice versa

Total of all Debits = Total of all Credits

Maintenance of BOA by following Dual Aspect Concept is referred as Double

Entry System of Accounting
Maintenance of BOA by disclosing only One Aspect is referred as Single Entry
System of Accounting - Not Allowed

Examples for Identification of aspects:

1 Goods Purchased of Rs. 100
Goods and Cash
Purchases and Cash
Goods and Creditor(Supplier)
Purchases and Creditor(Supplier)

Goods vs Purchases
Cash Vs Creditor

Goods
Goods should not be identified as an aspect in its name,
They should be identified through following four aspects: (Movement of
Goods will be identified as any one of the following four aspects)
a) Purchases - On Purchase of Goods
b) Sales - On Sale of Goods
c) Purchase Returns (Returns Outwards) - On return of Purchased Goods
d) Sales Returns (Returns Inward) - On return (by Customer) of Goods sold

Purchase and Cash - If it is a Cash Transaction

Purchase and Creditor - If it is a Credit Transaction
 Cash Transaction vs Credit Transaction
Settlement?
If settlement is done immediately - Cash Transaction
If settlement is not done immediately i.e., afterwards / Later on - Credit Transaction

Identification of Cash/Credit Transaction?

For Cash?
Yes - Cash Transaction
No - then verify Person (Supplier) name is given?
Yes- Credit Transaction
No - Cash Transaction

Goods Purchased of Rs. 100

For Cash?
No - then verify Person (Supplier) name is given?
No - Cash Transaction

Purchase and Cash are aspects

2 Goods Purchased from Mohan of Rs. 10,000

Purchases and Cash
Purchases and Mohan (Creditor/Supplier)

For Cash?
No - then verify Person (Supplier) name is given?
Yes- Credit Transaction
Purchases and Mohan (Creditor/Supplier)

3 Goods Purchased from Mohan on Credit of Rs. 10,000

For Cash?
No - then verify Person (Supplier) name is given?
Yes- Credit Transaction
Purchases and Mohan (Creditor/Supplier)

4 Goods Purchased from Mohan for Cash of Rs. 10,000

For Cash?
Yes - Cash Transaction
Purchases and Cash

5 Goods Purchased on Credit of Rs. 10,000

Don't apply rules since transaction directly says that goods are purchased on Credit
Credit Transaction
Purchases and Creditor/Supplier (Person)

6 Goods sold of Rs. 10,000

 Sales and Cash - Cash Transaction

7 Goods Sold to Mohan(Customer) of Rs. 10,000

Sales and Mohan - Credit Transaction

8 Goods Sold to Mohan(Customer) for Cash of Rs. 10,000

Sales and Cash - Cash Transaction

9 Rent paid to Mohan of Rs. 10,000

Mohan and Cash
Rent and Cash
Rent and Mohan

Cash is invloved (Paid), then Cash will be one of the Aspects

Purpose is Given then such purpose will be an Aspect - Rent (Ignore Person
name)
Purpose should be given importance over person name

10 Amt of Rs. 10,000 paid to Mohan

Mohan and Cash

Cash is invloved (Paid), then Cash will be one of the Aspects

Purpose is not given and hence Mohan is taken as an Aspect

11 Interest Received from Suresh of Rs. 10,000

Cash and Interest

Cash is invloved (Received), then Cash will be one of the Aspects

Purpose is Given then such purpose will be an Aspect - Interest (Ignore
Person name)

12 Amt of Rs. 10,000 received from Suresh

Cash and Suresh

Cash is invloved (Received), then Cash will be one of the Aspects

Purpose is not given and hence Suresh is taken as an Aspect

13 Cash brought in by Owner of Rs. 10,000

Cash and Capital

Cash is invloved (Received), then Cash will be one of the Aspects

Capital as an Aspect represents owner

14 Suresh introduced capital of Rs. 10,000

 Cash and Capital
Cash and Suresh's Capital
Cash and Suresh

Every Aspect is an Account

What is an Account?
Account - It is a Statement where in all transactions related to the ''name'' of
Statement are disclosed

Which aspect is Debit and Credit?

Identification of Debits and Credits

Two Approaches for identification of Debits and Credits:
I) Traditional Approach
II) Modern Approach

I) Traditional Approach
I) Classification Of Accounts - Three Types

a) Personal Accounts: It includes all the remaining accounts other than those
included in Real and Nominal Accounts (Dustbin). Further
classified in to (i) Natural (e.g. Mohan, Suresh), (ii) Artificial
(e.g. SBI, ISFS Pvt Ltd, RIL) and (iii)
Representative Personal Accounts (e.g. Capital, Drawings, all Prepaid and
Outstanding Exp, all Income Receivable and Income Received in Advance).
Assets(represented by a Person), All Liabilities.

b) Real Accounts - Includes ONLY Assets (Not ALL Assets)

c) Nominal Accounts - Includes all Expenses and Lossess & Incomes and Gains
e.g., Interest Income/Expense, Baddebts, Salaries, Profit/Loss on sale of
FA/Investments, Depreciation, Discount Allowed / Received etc
 II) Rules for Identification of Debits and Credits
a) Personal Accounts:
Debit the Receiver (If Person is Receiving from Business)
Credit the Giver (If Person is Giving to Business)

Amt of Rs. 10,000 paid to Mohan

Mohan A/c - Personal Account, Mohan is receiver of cash and hence Mohan A/c is to be Debited
Cash A/c - Real A/c

Amt of Rs. 10,000 received from Suresh

Cash and Suresh
Suresh A/c - Personal Account, Suresh is giver of Cash and hence Suresh A/c is to be Credited
Cash A/c - Real A/c

b) Real Accounts:
Debit what Comes-In
Credit what Goes-Out

Amt of Rs. 10,000 paid to Mohan

Cash A/c - Real A/c, Cash is going out of business and hence Cash A/c is to be Credited

Amt of Rs. 10,000 received from Suresh

Cash A/c - Real A/c, Cash is Coming-in to the business and hence Cash A/c is to be Debited

Purchased Buildings for Cash from Naveen of Rs. 1 Cr

Building A/c (Not Purchases a/c as Building is not Goods)
Real A/c, Building is Coming in to the business, hence Building a/c should be Debited

Cash A/c (Not Naveen A/c, as it is a Cash Transaction)

Real A/c, Cash is going out of business and hence Cash A/c is to be Credited

c) Nominal Accounts:
Debit all Expenses and Lossess
Credit all Incomes and Gains

Rent paid to Mohan of Rs. 10,000

Rent A/c - Nominal A/c (Expense), Rent A/c should be debited as it is an Expense
Cash A/c - Real A/c, Cash is going out of business and hence Cash A/c is to be Credited

Interest Received from Suresh of Rs. 10,000

Interest A/c - Nominal A/c (Income), Interest Income A/c should be Credited
Cash A/c - Real A/c, Cash is Coming-in to the business and hence Cash A/c is to be Debited
II) Modern Approach (is the language of FS)
Classification Of Accounts - Five Types
a) Expenses (incl Lossess)
b) Assets

c) Incomes (incl Gains)

d) Liabilities (Outside Liabilities)
e) Capital (Incl Drawings; Inside Liability)

Rules for Identification of Debits and Credits

For Expenses and Assets - Debit if Increasing
Credit if Decreasing

For Incomes, Liabilities and Capital - Debit if Decreasing

- Credit if Increasing

Accounting Equation
Expenses + Assets = Incomes + Liabilities + Capital…..Trial Balance Equation
Assets = Incomes - Expenses + Liabilities + Capital
Assets = Profit/Loss + Liabilities + Capital
Assets = Liabilities + Capital (incl P/L)…..Balance sheet Equation
Example:
Purchased Goods for Rs. 100
Two aspects
Purchases (Goods) - 100; Debit aspect
Cash (Paid) - 100; Credit aspect

Purchased Goods for Rs. 110

Purchased Goods for Rs. 500

Total of all Debits = Total of all Credits

(100+110+500) = (100+110+500)
710 = 710

1 unit 100
120

100 units
10 units Purchase Returns
 Assets
Real Personal

If an Asset is not If an Asset is

represented by a represented by a
person person

Examples:
Buildings Debtors
P&M Cash at Bank (SBI - An Artificial Person)
Vehicles
Cash in Hand

Every Real A/c is an Asset

 However every Asset is not a Real Account
Assets can be Real Accounts or Personal Accounts

A/c is to be Debited

s to be Credited

o be Debited

/c should be Debited

o be Debited
T,P&L A/c Performance = Incomes - Expenses
Balance sheet Position; Assets and Liabilities (Capital and Outside Liab)
SPECIAL TRANSACTIONS

1. TRANSACTIONS WITH THE PROPRIETOR/OWNER:

· Any transactions in between the business concern and its proprietor must be recorded in the books either in Capital A/c or
· If the proprietor gives any benefit to the business -»Capital A/c -> Credit
· If the proprietor takes / receives any benefit from the business -» Drawings A/c -» Debit
Note: As the Capital A/c and Drawings A/c represent the proprietor, they are called as Representative Personal A/c’s.
Don’t use: Proprietor A/c (or) Owner A/c (or) Boss A/c.

ILLUSTRATIONS:
1. Gopal started business with cash Rs.1,00,000
Gopal -»Proprietor -»Gives cash (Giving benefit to business) -> Capital A/c —> Credit (Giver or Increasing)
2. Gopal took goods from the business for his personal use Rs.500
Gopal Proprietor Receives goods (takes benefit from business), Drawings A/c -> Debit (Receiver or Decreasing)
3. Household furniture brought by Gopal into the business Rs.5,000
Gopal -»Proprietor -»Gives Furniture (Giving benefit to business) -> Capital A/c —> Credit (Giver or Increasing)

Drawings is a Temporary Account - During the year all withdrawals by Owner from Business are recorded in Drawings A/c.
And at the End of the year Closing Balance of Drawings A/c will be transferred to Capital A/c, by which D

2. CASH TRANSACTIONS - Cash is involved

Cash receipts and Cash payments are called as Cash Transactions
Cash A/c is a Real A/c as it is an asset(not represented by a Person).
If cash is received by the business or if cash comes into the business -»Cash A/c -> Debit.
If cash is paid by the business or if cash goes out from the business -> Cash A/c -> Credit.

3. TRANSACTIONS RELATING TO GOODS

· Goods are the items or articles or commodities, which are purchased or manufactred for the purpose of sale.
E.g.: For a furniture dealer Furniture is goods
For a stationery merchant -»Stationery is goods, For a rice stores -»Rice is goods, For a car dealer -> Cars are goods.
· Goods A/c is a Real A/c, but the usage of Goods A/c is not allowed in the subject.
· There will be a large number of transactions in respect of goods, which will be recorded in 4 different accounts as shown
Sl.No. Transaction Name of the A/c
1 If goods are purchased Purchases A/c
2 If goods are sold Sales A/c
Purchases Returns A/c(Returns
3 If goods are returned to the supplier
Outwards)

4 If goods are returned by the customer Sales Returns A/c (Returns Inward)

5 If goods are taken by the proprietor for his personal use Purchases A/c
6 If goods are distributed as free samples Purchases A/c
7 If goods are given away as charity Purchases A/c
8 If goods are utilized for making an asset Purchases A/c
9 If goods are destroyed by fire Purchases A/c
10 If goods are stolen Purchases A/c

Note: As “Goods" is an asset(not represented by any person), all the accounts relating to goods are considered as Real A/c’s.
The above four accounts can also be considered as Nominal Accounts, still answer of Debit or Credit remains same

4. TRANSACTIONS RELATING TO CHEQUES: Sometimes receipts and payments are made by cheques.
The transactions relating to cheques are recorded as shown below without using Cheque A/c.
Impact of Cheque is on Bank Balance and hence Bank A/c will be used in place of Cheque A/c.
S. Debit / Credit
Transaction
No
1 When a cheque is received by the business concern
a. If the cheque is deposited in bank on the same date of receiDebit (Increases)
b. If the cheque is not deposited in bank on the same date of rDebit
2 When a cheque is issued by the business concern or when a Credit (Decreases)
3 When a cheque deposited is returned by bank as dishonoured Credit (Decreases)
4 When a cheque issued is returned dishonoured (Reversing No.Debit (Increases)

Traditional Approach - Bank A/c is Personal A/c

Debit the Receiver
Credit the Giver

Modern Approach - Bank A/c is an Asset

Increases - Debit
Decreases - Credit
S.No. Transactions
1 Cash / Cheques deposited in bank Increase
2 Cash withdrawn from bank Decrease
3 Cheques issued Decrease
4 Deposited cheque, returned dishonoured (Reversal of 1) Decrease
5 Issued cheque, returned dishonoured (Reversal of 3) Increase
6 Direct deposit by a customer into the bank Increase
7 Any income collected by bank on behalf of the trader Increase
8 Any expense paid by bank on behalf of the trader Decrease
9 Bank charges(Expense) Decrease
10 Interest (Income) on bank deposits(Asset) Increase
11 Interest (Expense) on bank overdraft (Liability) Decrease

5. TRANSACTIONS RELATING TO DISCOUNT:

Discounts are of two types:
 i. Trade Discount: Discount at the time of Purchase or Sale is
called as Trade Discount. Reduction in list price of the goods
to be sold, allowed by the seller to the buy to increase the
sales by attracting more customers – NOT to be recorded in
the books.

ii. Cash Discount: Discount at the time of Settlement is

called as Cash Discount. Reduction in the amount due, to be
allowed by a creditor (Trade payable) to a debtor (Trade
receivable) for making an early payment. This will be of two
types.
a. Discount allowed to debtors while receiving amount from them -> Expense/Loss -> Debit.
b. Discount received from creditors while making payment to them -> Income -> Credit.

Trade Discount
Price per unit is 100
10 units
Discount?
Price per unit is now Rs. 90
Since discount is given at the time of Sale/Purchase, it is called as Trade Discount
Seller - Sales shall be recorded at 900 (10 units*90 pu)
Buyer - Purchases shall be recorded at 900 (10 units*90 pu)
Sales or Purchases shall be recorded net of Discount (after adjusting discount)
Hence, Trade Discount need not to be recorded separately
Trade Discount A/c should not be used.
T.D. is not ignored, it will be deducted from Purchases or sales and Net Purchases and Sales will be recorded

Cash Discount
Goods are sold on Credit of Rs. 10,000; with a credit period of 30 days
Buyer has done the payment within 10 days
for this early payment, seller has given discount of Rs. 100
This discount is called as Cash discount (Discount at the time of Settlement)
Buyer pays Rs. 9,900 instead of Rs. 10,000 A sold goods to B on credit
For Seller (Creditor), it is loss called as Discount Allowed For A (Seller): amt is recievable from B (Debtor)
For Buyer (Debtor), it is Income called as Discount received For B (Buyer): amt is payable to A (Creditor)
Cash Discount shall be recorded

6. TRANSACTIONS RELATING TO PURCHASES:

a. If goods are purchased either for cash or on credit -»Purchases A/c -> Debit (Coming-in)
b. If an asset (Fixed Asset) is purchased either for cash or on credit -> Fixed Asset (Specific) A/c -» Debit (Coming-in)
c. Cash Purchase
I. If Cash is paid -> Cash A/c -> Credit (Going-out)
II. If Cheque is issued -> Bank A/c -» Credit (Bank is giver or Bank balance decreases)
d. Credit purchase -> Personal A/c (Supplier or Creditor or Trade payable) -» Credit. (Payable or Giver)

7. TRANSACTIONS RELATING TO SALES:

a. If goods are sold either for cash or on Credit - Sales A/c Credited (Going-Out)
 b. If an asset (Fixed Asset) is sold either for cash or on Credit - Fixed Asset (Specific) A/c Credited (Going-Out)
c. Cash sale:
i. If Cash is received -> Cash A/c -» Debit
ii. If a Cheque is received -» Bank A/c -> Debit
d. Credit sale -> Personal A/c (Customer or Debtor or Trade receivable or Accounts Receivable) -> Debit

8. TRANSACTIONS RELATING TO EXPENSES:

a. Expense (Rent) paid -» Nominal A/c -> Expense(Rent) A/c -> Debit
b. Outstanding Expenses (Payable) - Representative Personal A/c (Liability)-> Outstanding Expense A/c -> Credit (Li
c. Pre-paid Expense -> Representative Personal A/c (Asset) -> Pre-paid Expense A/c -> Debit (Asset is increasing)
d. Personal Expense of Proprietor is paid from business money - proprietor takes / receives any benefit from the

9. TRANSACTIONS RELATING TO INCOMES:

a. Income received -> Nominal A/c -> Income A/c -> Credit
b. Outstanding or Accrued Or Receivable Income ->
Representative Personal A/c (Asset) -> Outstanding Income
A/c - Debit (Asset is increasing)
c. Income received in Advance or unaccrued or unearned
income -> Liability Representative personal A/c - Income
received in advance A/c -Credit (Liability is increasing)
d. Personal Income of Proprietor is received by business - Proprietor gives benefit to the business -»Capital A/c ->
 books either in Capital A/c or in Drawings A/c.

ative Personal A/c’s.

Increasing)

er or Decreasing)

er or Increasing)

recorded in Drawings A/c.

rred to Capital A/c, by which Drawings a/c is closed

e purpose of sale.

aler -> Cars are goods.

4 different accounts as shown below without using goods account.

Debit / Credit
Debit (in) Purch Expense (Nominal A/c) - Debit
Credit (Out) Sales Income (Nominal) - Credit

Credit (Out)

Debit (in)

Credit (Out)
Credit (Out)
Credit (Out)
Credit (Out)
Credit (Out)
 Credit (Out)

re considered as Real A/c’s.

or Credit remains same

Example for point 3

Sold goods to Anil of Rs. 10,000
cheque is received from Anil (Customers bank is ICICI)
Deposit such cheque in our bank (SBI)
Our SBI bank will ask money from ICICI bank
either amt will be received from ICICI bank
or amt may not be received from ICICI bank ( because of insufficient funds or signature not
matched), cheque is referred as Dishonoured

Example for point 1(a)

Date of Receipt of Cheque 6/5/2021
Bank A/c - Debit
Date of Deposit of Cheque to the Bank 6/5/2021

Example for point 1(b)

Date of Receipt of Cheque 6/5/2021 Cash A/c (or Cheque in Hand A/c) - Debit
Date of Deposit of Cheque to the Bank 6/10/2021 Bank A/c - Debit and Cash A/c (or Cheque in Hand A/c) - Credit
 Sales will be recorded

ievable from B (Debtor)

yable to A (Creditor)

cific) A/c -» Debit (Coming-in)

ayable or Giver)
/c Credited (Going-Out)

ceivable) -> Debit

nding Expense A/c -> Credit (Liability is increasing)

> Debit (Asset is increasing)
receives any benefit from the business -» Drawings A/c -» Debit

the business -»Capital A/c -> Credit

signature not

que in Hand A/c) - Credit

 Journal
Primary BOA / First
All Financial Transactions will be recorded in Chronological Order (Date wise or Time wise)
Process of Recording is called as - Journalising
Recorded information is called as Journal Entry/Entries

Format
Date Particulars LF No. Debit

Example Transactions:
5/10/2020 Goods Purchased for Rs. 10,000
5/11/2020 Goods sold for cash Rs. 12,000
Date Particulars LF No. Debit
5/10/2020 Purchases A/c Dr 10,000
To Cash A/c
(Being Goods purchased for cash) - Narration
5/11/2020 Cash A/c Dr 12,000
To Sales A/c
(Being Goods Sold for Cash)

JOURNAL: The word Journal is derived from the French

word “Jour”, which means a day. So, the book which is
used to record day to day transactions is called “Journal”.
This is the first accounting record. All the business financial
transactions are recorded first in the “Journal”. So Journal
is called as a book of first/Prime entry or book of original
entry or day book or Primary Book.

JOURNALISING: The process of recording business

transactions and events in the book “Journal” is called as
Journalizing.

JOURNAL ENTRY: The transactions and events which are

recorded or entered in the book “Journal” are called as
“Journal Entries”.

CHRONOLOGICAL ORDER: All the business transactions

and events are recorded in the journal in the order of
time. This order of time is called Chronological order.

ANALYSIS OF SOME IMPORTANT BUSINESS TRANSACTIONS

1. Gopal started business with cash Rs.10,000 (or) Gopal commenced business with Rs.10,000.
a. Gopal -» Proprietor -»Capital A/c - Personal A/c -> Gopal gave cash to the business -> credit the giver -> So Ca
 b. Cash -» Asset (Real) -> Cash came into the business -» Debit what comes in -> So, cash A/c is to be debited.

Debit Credit
Particulars
Rs. Rs.
Cash A/c Dr 10,000
To Capital A/c 10,000
(Being the business started with cash)

2. Cash taken by Gopal (Proprietor) for personal use Rs.500 (or) Drew for personal use Rs.500
a. Gopal -» Proprietor -» Personal A/c - Gopal received cash from the business - Debit the receiver- So Drawings
b. Cash -> Asset - Real A/c -» Cash went out from the business -» Credit what goes out - So, cash A/c is to be cre

Drawings A/c Dr 500

To Cash A/c
(Being cash taken for personal use)

3. Goods purchased for cash from Ravi Rs.5,000 (or) Purchases Rs.5,000 (or) Goods purchased for cash Rs.5,000.
a. Goods -Asset ~ Real A/c - Goods come into business -> Debit what comes in -> So Purchases A/c (Goods A/c) i
b. Cash -> Asset -> Real A/c - Cash went out from the business - Credit what goes out - So, cash A/c is to be cred

Purchases A/c Dr. 5,000

To Cash A/c 5,000
(Being the goods purchased for cash)

4. Goods sold for cash to Mohan Rs.4,000 (or) Sales Rs.4,000 (or) Goods sold for cash Rs.4,000
Cash -Asset -Real A/c - Cash came into business -» Debit what comes in -> So, cash A/c is to be debited.
Goods - Asset -> Real A/c - Goods went out from the business -> Credit what goes out -» So, Sales A/c (Goods A/

Cash A/c Dr 4,000

To Sales A/c
(Being the goods sold for cash)

5. Goods purchased from Venkatesh Rs.3,000 (or) Venkatesh supplied goods to us Rs.3,000
a. Venkatesh -* Personal A/c -» Venkatesh gave goods to the business -> Credit the giver - So, Venkatesh A/c is t
b. Goods - Asset - Real A/c -» Goods came into business - Debit what comes in - So Purchases A/c (Goods A/c) is

Purchases A/c Dr 3,000

To Venkatesh A/c
(Being goods purchased on credit)

6. Goods sold to Pavan Rs.6,000 (or) Pavan purchased goods from us Rs.6,000.
a. Pavan -» Personal A/c -»» Pavan received goods from the business -> Debit the receiver -> So, Pavan A/c is to
b. Goods -> Asset -» Real A/c -» Goods went out from the business -» Credit what goes out - So Sales A/c (Good

Pavan A/c Dr 6,000

 To Sales A/c
(Being the goods sold on credit)

7. Goods returned by Ramesh Rs.1,000

a. Ramesh -» Personal A/c Ramesh gave goods to the business Credit the giver So, Ramesh A/c is to be Credited
b. Goods -» Asset -> Real A/c -» Goods came into the business -» Debit what comes in -> So, Sales Returns A/c (G

Sales Returns or Returns Inwards A/c Dr 1,000

To Ramesh A/c
(Being the goods returned by Ramesh)

8. Goods returned to Mahesh Rs.1,000.

Mahesh -» Personal A/c Mahesh received goods from the business Debit the receiver -> So, Mahesh A/c is to be
Goods -»Asset -» Real A/c -> Goods went out' So Purchase returns A/c (Goods A/c) is to be – is to be credited.

Mahesh A/c Dr. 1,000

To Purchases Returns or Returns Outward A/c 1,000
(Being the goods returned to Mahesh)

9. Furniture purchased for cash from Ramesh Rs.5,000.

a. Furniture -> Asset -» Real A/c -> Furniture came into business Debit what comes in -> So, Furniture A/c is to b
b. Cash -> Asset -» Real A/c -» Cash went out from business -» Credit what goes out -> So, Cash A/c is to be Cred

Furniture A/c Dr 5,000

To Cash A/c
(Being furniture purchased for cash)

10. Machinery purchased from Tata Ltd., Rs.10,000

Tata Ltd., -> Personal A/c -> Tata Ltd., gave machinery to business - Credit the giver —> So, Tata Ltd A/c is to be
Machinery - Asset -> Real A/c Machinery came into business -» Debit what comes in -»So, Machinery A/c is to b

Machinery A/c Dr 10,000

To Tata Ltd A/c 10,000
(Being machinery purchased from Tata Ltd.,)

11. Motor car sold to Anil Rs.25,000.

a. Anil -> Personal A/c -» Anil received motor car from business -> Debit the receiver -» So, Anil A/c is to be debi
b. Motor car -» Asset Real A/c -» Motor car went out from business -> Credit what goes out -»So, Motor car A/c

Anil A/c Dr 25,000

To Motor Car A/c
(Being motor car sold on credit)

12. Old cycle sold to Kalyan for cash Rs.500.

a. Cash -» Asset - Real A/c -> Cash came into business - Debit what comes in -> So, Cash A/c is to be debited.
 b. Cycle-» Asset -> Real A/c -> Cycle went out from business – Credit what does out - So, Cycle A/c is to be Cred

Cash A/c Dr. 500

To Cycle A/c 500
(Being old cycle sold for cash)

13. Received from Vishnu Rs.1,000 (or) Cash received from Vishnu Rs.1,000
a. Vishnu - Personal A/c - Vishnu gave cash to business -> Credit the giver -» So, Vishnu A/c is to be credited.
b. Cash -» Asset -» Real A/c -> Cash came into business -» Debit what comes in Cash – So Cash A/c is to be debit

Cash A/c Dr 1,000

To Vishnu A/c
(Being cash received from Vishnu)

14.Paid to Uday Rs.500 (or) Cash paid to Uday Rs.500

a. Uday -» Personal.A/c -» Uday received cash from business - Debit the receiver -» So, Uday A/c is to be debited
b. Cash -»Asset -> Real A/c -> Cash went out from the business -» Credit what goes out -> So, Cash A/c is to be C

Uday A/c Dr 500

To Cash A/c
(Being the cash paid to Uday)

15. Paid Rent to Gopal Rs.1,000 (or) Cash paid to Gopal towards Rent Rs.1,000 (or) Rent Rs.1,000 (or) Rent paid by cash Rs.1,0
a. Cash -»Asset -> Real A/c -> Cash went out from business -> Credit what goes out -» So, Cash A/c is to be credi
b. Rent paid -» Expense Nominal A/c -» Debit all expenses & losses -»So, Rent A/c is to be debited.
Rent A/c Dr 1,000
To Cash A/c
(Being the rent paid to Gopal)
Note-1: The expense paid should not be debited to the Personal A/c. It should be debited to the concerned Expen
Purpose should be given importance over person name
Note-2: Rent, commission, Interest etc. may be received by the business or paid by the business, if it is not know

16. Commission received from Suman Rs.600 (or) Cash received from Suman towards commission Rs.600 (or) Commission rec
Cash -Asset -> Real A/c Cash came into the business -» Debit what comes in -> So, Cash A/c is to be debited.
Commission received - Income -» Nominal A/c - Credit all incomes & gains - So, Commission received A/c is to b

Cash A/c Dr. 600

To Commission Income A/c 600
(Being the commission received from Suman)
Note: If any income is received it – should not be credited to the Personal A/c. It should be credited to the conce
Purpose should be given importance over person name

17. Cash deposited in bank Rs.2,000 (or) Paid into bank Rs.2,000
a. Bank -» Personal A/c Bank received the cash from the business -> Debit the receiver So, Bank A/c is to be deb
 b. Cash -> Asset -> Real A/c Cash went out from the business -> Credit what goes out -> So, Cash A/c is to be cre

Bank A/c Dr 2,000

To Cash A/c
(Being the cash deposited in the bank)

18. Cash withdrawn from bank Rs. 1000 (or) Cash withdrawn from bank for office use Rs.1,000 (or) Drew from bank for office
a. Bank - Personal A/c -> Bank gave cash to the business -» Credit the giver -> So, Bank A/c is to be credited.
b. Cash -> Asset -> Real A/c -» Cash came into business -» Debit what comes in -» So, Cash A/c is to be debited.

Cash A/c Dr 1,000

To Bank A/c 1,000
(Being cash withdrawn from bank for office use)

19. Cash withdrawn from bank for private use Rs.100 (or) Drew from bank for personal use Rs.100
a. Bank -» Personal A/c - Bank gave cash to the proprietor - Credit the giver - So, Bank A/c is to be credited.
b. Proprietor - Drawings A/c -» Personal A/c -> Proprietor received cash from bank -> Debit the receiver -> So, D

Drawings A/c Dr 100

To Bank A/c 100
(Being cash withdrawn from bank for private use)

20. Own furniture and Goods brought by the proprietor into the business of Rs.5,000 and Rs 1000 repectively
a. Proprietor -» Personal A/c -> Proprietor gave furniture to the business -> Credit the giver -> So, Capital A/c is
b. Furniture -> Asset -» Real A/c -> Furniture came into the business -» Debit what comes in -> So, Furniture A/c
c. Goods - Asset - Real A/c - Coming into Business - Purchase A/c is to be Debited

Furniture A/c Dr. 5,000

Purchases A/c Dr 1,000
To Capital A/c 6,000
(Being own furniture brought into the business)

21. Old cycle taken by the proprietor for his personal use Rs.500.
a. Proprietor -» Personal A/c -» Proprietor received old cycle from the business - Debit the receiver – So, Drawin
b. Cycle -> Asset -> Real A/c -» Cycle went out from the business -» Credit what goes out -> So, Cycle A/c is to be

Drawings A/c Dr 500

To Cycle A/c 500
(Being old cycle taken by the proprietor for his
personal use)

22. Goods taken by the proprietor for his personal use Rs.5,000.
a. Proprietor Personal A/c -> Proprietor received goods from business Debit the receiver -> So, Drawings A/c (Pr
b. Goods - Asset —> Real A/c -> Goods went out from business -> Credit what goes out -> So, Purchases A/c (Go
 Drawings A/c Dr 5,000
To Purchases A/c
(Being goods taken for personal use)

23. Received from Kiran on account Rs.1,500.

a. Kiran -» Personal A/c -> Kiran gave cash to the business -> Credit the giver -> So Kiran A/c is to be Credited.
b. Cash -»Asset -» Real A/c -> Cash came into the business -» Debit what comes in So, Cash A/c is to be debited.

Cash A/c Dr 1,500

To Kiran A/c
(Being the cash received from Kiran)

24. Received from Kiran Rs.1,850 & Discount allowed to him Rs.150. (or) Cash received from Kiran Rs.1,850, in full settleme
a. Kiran -» Personal A/c -»Kiran gave cash to business -»Credit the giver -» So, Kiran A/c is to be credited.
b. Cash -»Asset -» Real A/c -> Cash came into business -» Debit what comes in -> So, Cash A/c is to be debited.
c. Discount Allowed -» Expense -» Nominal A/c -» Debit all expenses & losses -> So, Discount Allowed A/c is to b

Cash A/c Dr 1,850

Discount Allowed A/c Dr 150
To Kiran A/c 2,000
(Being cash received from Kiran and discount allowed to
him)

25. Paid to Naveen on account of Rs.900

Naveen -> Personal A/c – Naveen received cash from business - Debit the receiver -> So, Naveen A/c is to be de
Cash -> Asset -> Real A/c -» Cash went out from business - Credit what goes out – so, Cash A/c is to be Credited

Naveen A/c Dr 900

To Cash A/c
(Being cash paid to Naveen)

26. Paid to Naveen Rs.900 & Discount received from him Rs.100 (or) Cash paid to Naveen Rs.900, in full settlement of his acco
Naveen -> Personal A/c – Naveen received cash from business - Debit the receiver -> So, Naveen A/c is to be de
Cash -> Asset -> Real A/c -» Cash went out from business - Credit what goes out – so, Cash A/c is to be Credited
c. Discount Received -> Income Nominal A/c -» Credit all Incomes & Gains -> So, Discount Received A/c is to be

Naveen A/c Dr 1,000

To Cash A/c 900
To Discount Received A/c 100
(Being cash paid to Naveen and discount received from
him)

27. Loan taken from Sunil Rs.10,000.

a. Sunil -» Personal A/c -» Sunil gave cash to business -» Credit the giver -» So, Sunil’s Loan A/c is to be credited.
b. Cash Asset -» Real A/c -» Cash came into business -> Debit what comes in -» So, Cash A/c is to be debited.
 Cash A/c Dr 10,000
To Loan from Sunil A/c
(Being the loan taken from Sunil)

28. Interest on loan paid to Sunil Rs.100.

a. Cash -> Asset -> Real A/c -> Cash went out from the business —> Credit what goes out -» So, Cash A/c is to be
b. Interest Expense -» Expense -» Nominal A/c -» Debit all expenses & losses So, Interest paid A/c is to be debite

Interest Expense A/c Dr 100

To Cash A/c
(Being Interest paid to Sunil)
29. Loan repaid to Sunil Rs.10,000.
Sunil -» Personal A/c - Sunil received cash from business - Debit the receiver -> So, Sunil’s loan A/c is to be debit
Cash -> Asset -> Real A/c - Cash went out from business - Credit what goes out -» So, Cash A/c is to be Credited.

Loan from Sunil A/c Dr 10,000

To Cash A/c
(Being the loan repaid to Sunil)

30. Loan given to Anil Rs.5,000.

a. Anil Personal A/c -> Anil received cash from business -> Debit the receiver -» So, Anil’s loan A/c is to be debite
b. Cash -> Asset -> Real A/c -> Cash went out from business - Credit what goes out -> So, Cash A/c is to be Cred
Loan to Anil A/c Dr 5,000
To Cash A/c
(Being loan given to Anil)

31. Interest on loan received from Anil Rs.500.

Cash -» Asset -» Real A/c -> Cash came into business - Debit what comes in -> So, Cash A/c is to be debited.
Interest Income -» Nominal A/c - Credit all incomes & gains - So, Interest Received A/c is to be credited.
Cash A/c Dr 500
To Interest Income A/c
(Being interest received from Anil)

32. Loan repaid by Anil Rs.5000

a. Anil -> Personal A/c -» Anil gave cash to business -» Credit the giver - So, Anil Loan A/c is to be credited.
b. Cash -» Asset Real A/c -> Cash came into business - Debit what comes in -> So, Cash A/c is to be debited.

Cash A/c Dr 5,000

To Loan to Anil A/c
(Being loan repaid by Anil)

33. Cheque received from Bala Krishna Rs.1,000 and immediately deposited into Bank
a. Bala Krishna -» Personal A/c -» Bala Krishna gave cheque to business -» Credit the giver -»So, Bala Krishna A/c
b. Bank -» Personal A/c -> Bank received cheque from business -> Debit the receiver So, Bank A/c is to be debite
 Bank A/c Dr 1,000
To Bala Krishna A/c 1,000
(Being cheque received from Bala Krishna)

34. Cheque issued to Venkatesh Rs.5,000 (or) Paid to Venkatesh by cheque Rs.5,000
Venkatesh -» Personal A/c -» Venkatesh received cheque from the bueiness – Debit the receiver -> So, Venkate
Bank - Personal A/c -> Bank gives cash to Venkatesh – Credit the giver – So, Bank A/c is to be credited.

Venkatesh A/c Dr 5,000

To Bank A/c
(Being cheque issued to Venkatesh)

35. Cheque received from Balaji towards commission Rs.1,000 and immediately deposited into Bank
a. Bank -> Personal A/c -» Bank received cheque from business -» Debit the receiver -> So, Bank A/c is to be deb
b. Commission Income -> Nominal A/c -> Income -> Credit all Incomes & Gains -> So, Commission received is to

Bank A/c Dr 1,000

To Commission Income A/c
(Being commission received)

36. Rent paid to Brahmanandam by cheque Rs.500 (or) Cheque issued to Brahmanandam towards rent Rs.500.
a. Bank -> Personal A/c -> Bank gives cash to Brahmanandam -> Credit the giver -> So, Bank A/c is to be credited
b. Rent- Expense -> Nominal A/c -> Debit all expenses & losses -»So, Rent A/c is to be debited

Rent A/c Dr 500

To Bank A/c
(Being rent paid by cheque)

37. Gopal started business with cash Rs.20,000, furniture Rs.5,000, Goods Rs.6,000 & Machinery Rs.10,000.
a. Gopal -» Proprietor -> Personal A/c Gopal gave some assets to the business -» Credit the giver -> So, Capital A
b. Cash, furniture, goods, machinery -» Assets -» Real A/cs -» These assets came into the business -> Debit what

Cash A/c Dr 20,000

Furniture A/c Dr 5,000
Purchases A/c (Goods) Dr 6,000
Machinery A/c Dr 10,000
To Capital A/c
(Being business started with cash, furniture, goods and machinery)

38. Amount due from Prasad Rs.500 was written off as bad debt, as he became insolvent.
Prasad - Personal A/c -» Trade Receivable (Debtor) - There will be a debit balance in his account - To cancel this
Amount which cannot be recovered from Prasad – Bad debt – Loss – Nominal A/c - Debit all expenses & losses

Bad debts A/c Dr 500

To Prasad A/c 500
 (Being amount due from Prasad written off as bad debt)

39. Bad debts recovered from Prasad Rs.300.

a. Cash - Asset Real A/c -» Cash came into business -» Debit what comes in -» So, Cash A/c is to be debited.
b. Bad debts recovered -> Income -> Nominal A/c -> Credit all incomes & gains -> So, Bad debts recovered A/c is

Cash A/c Dr 300

To Bad debts recovered A/c
(Being bad debts recovered from X)
Note: “Bad debt recovered” should not be credited to the Personal A/c.

40. Purchased an old building from Ramaiah for cash Rs.1,00,000; spent Rs.25,000 for its repairs and Rs.15,000 for registration
a. Building - Asset -> Real A/c -» Building came into business -» Debit what comes in -> So, Building A/c is to be d
b. Cash - Asset -> Real A/c - Cash went out from business - Credit what goes out - So, Cash A/c is to be credited

Building A/c (1,00,000 + 25,000 + 15,000) Dr 140,000

To Cash A/c 140,000
(Being building purchased for cash)
Note: Any expenditure incurred on an asset, till it is brought into use for the first time, should be added to the co

41. A new building was constructed. The following expenses were incurred for its construction,
(a) Building material Rs.1,00,000 (b) Labour Rs.16,000 (c) Architect fee Rs.5,000.
a. Building -> Asset -» Real A/c -> Building came into business -» Debit what comes in -» So, Building A/c is to be
b. Cash -»Asset -> Real A/c -» Cash went out from business Credit what goes out -> So, Cash A/c is to be credite

Building A/c (1,00,000 + 16,000 + 5,000) Dr 121,000

To Cash A/c 121,000
(Being expenses paid for the construction of building)

42. Machinery purchased from X Ltd., Germany, for Rs.5,00,000; Expenses paid on it - Freight Rs.10,000, Customs duty Rs.50,0
a. Machinery -» Asset -» Real A/c -» Machine? Came into business – debit what comes in – So, Machinery A/c is
b. X Ltd -» Personal A/c - X Ltd gave machinery to business -> Credit the giver -> So, X Ltd. A/c is to be credited.
c. Cash - Asset -» Real A/c -» Cash went out from business – Credit what goes out – So Cash A/c is to be credited

Machinery A/c Dr. 600,000

(5,00,000 + 10,000 +50,000+40,000)
To X Ltd A/c (Amount payable to X Ltd.,) 500,000
To Cash A/c (10,000+50,000+40,000) 100,000
(Being machinery purchased from X Ltd)

43. Repairs made to Motor car Rs.5000.

a. Repairs Expense -» Nominal A/c -» Debit all expenses & losses -» So, Repairs A/c is to be debited.
b. Cash -»Asset -> Real A/c -> Cash went out from business -> Credit what goes out So, Cash A/c is to be credited

Repairs A/c Dr 5,000

 To Cash A/c
(Being repairs made to motor car)

44. Interest on Capital Rs.500

a. Capital -> Personal A/c -»Interest on Capital will increase the credit balance of Capital A/c (Liability is increasi
b. Interest on Capital - Expense -» Nominal A/c Debit all expenses & losses So, Interest on Capital A/c is to be de

Interest on Capital A/c Dr 500

To Capital A/c
(Being interest charged on capital)

45. Interest on drawings Rs.1,000.

a. Proprietor -» Personal..-A/c -> Interest on drawings will decrease the credit balance of Capital A/c -» So, Capit
b. Interest on drawings -» Income -» Nominal A/c -» Credit all incomes & gains -> So, Interest on Drawings A/c is

Capital A/c Dr 1,000

To Interest on drawings A/c
(Being interest charged on drawings)
Note: As interest on drawings increases the amount of drawings, it can be debited to the Drawings A/c also.

46. Bank charges Rs.50

a. Bank -» Personal A/c -» We have to pay bank charges to the bank for its services. If any amount is payable to
b. Bank charges -> Expense -> Nominal A/c – Debit all expenses & losses – So, Bank, charges A/c is to be debited

Bank charges A/c Dr. 50

To Bank A/c 50
(Being amount charged by Bank for its services)

47. Interest on Bank deposits Rs.1,000.

a. Bank -» Personal A/c -» Bank has to give Interest on deposits to our business. If any amount is receivable or d
b. Interest on deposits - Income -» Nominal A/c Credit all Incomes & gains -»So, Interest on deposit A/c is to be

Bank A/c Dr 1,000

To Interest on Bank deposits A/c 1,000
(Being interest allowed by bank on deposits)

48. Interest on Bank Overdraft Rs.200.

a. Bank -> Personal A/c Interest on overdraft is payable to the bank - If any amount is payable to a person that p
b. Interest on overdraft - Expense -> Nominal A/c Debit all expenses & losses So, Interest on Overdraft A/c is to

Interest on Overdraft A/c Dr 200

To Bank A/c 200
(Being interest charged by bank on overdraft)

Note:
 Because of an Expense (Dr), Bank balance Decreases (Cr)
Because of an Income (Cr), Bank balance Increases (Dr)

49. Interest on Investments collected by Bank Rs.1,000.

a. Bank -» Personal A/c -» Bank received interest on investments on behalf of us -» Debit the receiver -> So, Ban
b. Interest on Investments -» Income -> Nominal A/c -> Credit all Incomes & gains So, Interest on Investments A

Bank A/c Dr 1,000

To Interest on Investments A/c 1,000
(Being interest on investments collected by bank)

50. Insurance Premium paid by Bank Rs.2,000

a. Bank -» Personal A/c -» Bank paid insurance premium on behalf of us -» Bank gave benefit to the business Cre
b. Insurance premium -» Expense -» Nominal A/c Debit all expenses & losses -» So, Insurance Premium A/c is to

Insurance premium A/c Dr. 2,000

To Bank A/c 2,000
(Being insurance premium paid by the

51. Cash stolen from business Rs.10,000.

a. Cash -> Asset -» Real A/c -> Cash went out from business - Credit what goes out - Cash A/c is to be credited.
b. Cash stolen -» Loss -> Nominal A/c -> Debit all expenses & losses -> So, Loss by Theft A/c is to be debited.

Loss of Cash by Theft A/c Dr 10,000

To Cash A/c
(Being cash stolen from business)

52. Goods purchased from Kumar for Rs.10,000 and paid Rs. 2,000 to him.
a. Kumar -> Personal A/c -> Kumar gave goods to the business -» Credit the giver - So, Kumar’s A/c is to be credi
b. Goods -> Asset Real A/c -> Goods came into business - Debit what comes in - So, Purchases A/c (Goods A/c) is
c. Cash -> Asset -» Real A/c -» Cash went out from business -> Credit what goes out -» So, Cash A/c is to be cred

Purchases A/c Dr 10,000

To Cash A/c 2,000
To Kumar (Creditor) A/c (10,000 - 2,000) 8,000
(Being goods purchased from Kumar and cash paid to him)

53. Goods sold to Ravi for Rs.12,000 and received Rs.5,000 from him.
a. Ravi -» Personal A/c -» Ravi received goods from business - Debit the receiver -> So, Ravi’s A/c is to be debite
b. Goods- Asset Real A/c -» Goods went out from business -» Credit what goes out -> So, Sales A/c (Goods A/c) i
c. Cash -> Asset -» Real A/c -> Cash came into business -» Debit what comes in -» So, Cash A/c is to be debited.

Cash A/c Dr 5,000

Ravi A/c (12,000-5,000) Dr 7,000
To Sales A/c 12,000
 (Being goods sold to Ravi and cash received from him)

54. Paid - Life Insurance Premium Rs.500, Income Tax Rs.1,000 & Rent of Residence Rs.2,000
a. Cash -»Asset -» Real A/c -> Cash went out from business -» Credit what goes out -» So, Cash A/c is to be cred
b. Life Insurance Premium, Income Tax & Rent of Residence -» These are personal expenses of the proprietor ->

Drawings A/c (500 + 1,000 + 2,000) Dr 3,500

To Cash A/c 3,500

(Being personal expenses of the proprietor paid)

55. Paid Rent Rs.1,000, Salaries Rs.2,000 and Postage Rs.100

a. Cash-Asset- Real A/c -» Cash went from business -» Credit what goes out – So, Cash A/c is to be credited.
b. Rent, Salaries & Postage - Business expenses – Nominal A/cs – Debit all expenses & losses – So, Rent Salaries

Rent A/c Dr. 1,000

Salaries A/c Dr 2,000
Postage A/c Dr. 100
To Cash A/c 3,100
(Being business expenses paid)

56. Goods destroyed by fire Rs.5,000

a. Goods - Asset Real A/c -> Goods went out from the business -» Credit what goes out -» So, Purchases A/c is to
b. Loss by Fire - Nominal A/c -> Debit all expenses and losses - So, Loss by Fire a/c is to be debited.

Loss by Fire (or) Abnormal Loss A/c Dr. 5,000

To Purchases A/c
(Being the goods destroyed by fire)

57. Depreciation on Machinery Rs.5,000

a. Machinery -> Asset -> Real A/c -> The value of Machinery decreases -> The debit balance of Machinery A/c is
b. Depreciation -> Loss Nominal A/c -» Debit all expenses and losses - So, Depreciation A/c is to be debited.

Depreciation A/c Dr. 5,000 '

To Machinery A/c 5,000
(Being the decrease in the value of Machinery)

58. Outstanding Salaries Rs.1,000

Salaries A/c (Expense) Dr. 1,000
To Outstanding Salaries A/c (Liability) 1,000

59. Prepaid Salaries Rs.500

Prepaid Salaries A/c (Asset) Dr. 500
To Salaries A/c (Expense) 500
60. Commission Income Receivable Rs. 1,000
Comm. Income Receivable A/c (Asset) Dr. 1,000
To Commission Income A/c 1,000

61. Commission Income Received in Advance Rs. 500

Commission Income A/c Dr. 500
To Comm. Inc Received in Advance A/c (Liability) 500

62. Cash Paid for Charity/ as Donation of Rs. 1000

Charity or Donation A/c Dr 1000
To Cash A/c 1000

COMPOUND OR COMPOSITE OR COMBINED ENTRY:

Sometimes, a transaction may involve more than two
accounts. Sometimes, there may be more transactions of
the same nature taking place on the same date. Such
transactions may be recorded by means of a single Journal
entry instead of passing separate entries. Such an entry is
called ‘Combined or Composite’ or ‘Compound Journal
Entry’. It may be recorded in the following three cases:
1) By debiting one account and crediting two or more accounts; or
2) By debiting two or more accounts and crediting one account; or
3) By debiting two or more accounts and crediting two or more accounts.
 Credit

Credit

10,000

12,000

usiness -> credit the giver -> So Capital A/c is to be credited.

 -> So, cash A/c is to be debited.

s - Debit the receiver- So Drawings A/c is to be debited.

goes out - So, cash A/c is to be credited.

500

ed for cash Rs.5,000.

n -> So Purchases A/c (Goods A/c) is to be debited.
oes out - So, cash A/c is to be credited.

cash A/c is to be debited.

goes out -» So, Sales A/c (Goods A/c) is to be credited.

4,000

it the giver - So, Venkatesh A/c is to be credited.

n - So Purchases A/c (Goods A/c) is to be debited.

3,000

the receiver -> So, Pavan A/c is to be debited.

what goes out - So Sales A/c (Goods A/c) is to be credited.
 6,000

r So, Ramesh A/c is to be Credited.

omes in -> So, Sales Returns A/c (Goods A/c) is to be debited.

1,000

receiver -> So, Mahesh A/c is to be debited.

A/c) is to be – is to be credited.

omes in -> So, Furniture A/c is to be debited.

es out -> So, Cash A/c is to be Credited.

5,000

e giver —> So, Tata Ltd A/c is to be credited.

mes in -»So, Machinery A/c is to be Debited.

eceiver -» So, Anil A/c is to be debited.

what goes out -»So, Motor car A/c is to be credited.

25,000

> So, Cash A/c is to be debited.

es out - So, Cycle A/c is to be Credited.

On Purchase Cycle A/c - Debit

On Sale of Old Cycle Cycle A/c - Credit
Don't Credit Old Cycle A/c

o, Vishnu A/c is to be credited.

n Cash – So Cash A/c is to be debited.

1,000

ver -» So, Uday A/c is to be debited.

goes out -> So, Cash A/c is to be Credited.

500

1,000 (or) Rent paid by cash Rs.1,000.

s out -» So, Cash A/c is to be credited.
A/c is to be debited.

1,000

be debited to the concerned Expense A/c only.

d by the business, if it is not known whether it is a payment or a receipt we have to consider it as an expense(Payment).

ission Rs.600 (or) Commission received Rs.600

> So, Cash A/c is to be debited.
o, Commission received A/c is to be credited.

It should be credited to the concerned Income Account only.

receiver So, Bank A/c is to be debited.

oes out -> So, Cash A/c is to be credited.

2,000

00 (or) Drew from bank for office expenses Rs.1,000

So, Bank A/c is to be credited.
n -» So, Cash A/c is to be debited. ^

So, Bank A/c is to be credited.

bank -> Debit the receiver -> So, Drawings A/c is to be debited.

1000 repectively
edit the giver -> So, Capital A/c is to be credited.
what comes in -> So, Furniture A/c is to be debited.

ss - Debit the receiver – So, Drawings A/c is to be debited.

at goes out -> So, Cycle A/c is to be credited.

he receiver -> So, Drawings A/c (Proprietor A/c) is to be debited.

goes out -> So, Purchases A/c (Goods A/c) is to be credited at cost.
 5,000

> So Kiran A/c is to be Credited.

es in So, Cash A/c is to be debited.

1,500

m Kiran Rs.1,850, in full settlement of his account of Rs.2,000.

Kiran A/c is to be credited.
n -> So, Cash A/c is to be debited.
-> So, Discount Allowed A/c is to be debited.

eiver -> So, Naveen A/c is to be debited.

out – so, Cash A/c is to be Credited.

900

s.900, in full settlement of his account of Rs.1,000

eiver -> So, Naveen A/c is to be debited.
out – so, Cash A/c is to be Credited.
So, Discount Received A/c is to be credited.

, Sunil’s Loan A/c is to be credited.

» So, Cash A/c is to be debited.
 Additional Note:
10,000 Loan Taken Liability
Int on Loan taken(Paid) Expense

at goes out -» So, Cash A/c is to be Credited.

So, Interest paid A/c is to be debited.

100

> So, Sunil’s loan A/c is to be debited.

t -» So, Cash A/c is to be Credited.

10,000

Additional Note:
» So, Anil’s loan A/c is to be debited.
Loan Given Asset
s out -> So, Cash A/c is to be Cred Int on Loan Given(Received) Income

5,000

So, Cash A/c is to be debited.

eived A/c is to be credited.

500

nil Loan A/c is to be credited.

So, Cash A/c is to be debited.

5,000

dit the giver -»So, Bala Krishna A/c is to be credited.

eceiver So, Bank A/c is to be debited.
 Debit the receiver -> So, Venkatesh A/c is to be debited
ank A/c is to be credited.

5,000

eceiver -> So, Bank A/c is to be debited.

s -> So, Commission received is to be credited.

1,000

wards rent Rs.500.

er -> So, Bank A/c is to be credited.
is to be debited

500

nery Rs.10,000.
-» Credit the giver -> So, Capital A/c is to be credited.
me into the business -> Debit what comes in So, these asset accounts are to be debited individually.

41,000

nce in his account - To cancel this debit balance his account is to be credited.
A/c - Debit all expenses & losses -» So, Bad debt A/c is to be debited.
So, Cash A/c is to be debited.
s -> So, Bad debts recovered A/c is to be credited.

300

pairs and Rs.15,000 for registration.

mes in -> So, Building A/c is to be debited.
out - So, Cash A/c is to be credited.

rst time, should be added to the cost of the asset and should be debited to that particular Asset A/c only.

omes in -» So, Building A/c is to be debited.

out -> So, Cash A/c is to be credited.

t Rs.10,000, Customs duty Rs.50,000, Installation expenses Rs.40,000.

at comes in – So, Machinery A/c is to be debited.
-> So, X Ltd. A/c is to be credited.
out – So Cash A/c is to be credited.

s A/c is to be debited.
s out So, Cash A/c is to be credited.
 5,000

of Capital A/c (Liability is increasing)-» So, Capital A/c is to be credited.

Interest on Capital A/c is to be debited.

500

balance of Capital A/c -» So, Capital A/c is to be debited.

s -> So, Interest on Drawings A/c is to be credited.

1,000

bited to the Drawings A/c also.

vices. If any amount is payable to a person, that Person’s credited. be credited -> So, Bank A/c is to be
Bank, charges A/c is to be debited.

ss. If any amount is receivable or due from a person that person’s A/c is to be debited -» So, Bank A/c is to be debited.
o, Interest on deposit A/c is to be credited.

Additional Note:
Deposits (Fixed Deposit) Asset
Int on Deposits Income

Additional Note:
mount is payable to a person that person’s A/c is to be credited -> So, Bank A/c is to be credited. Bank Overdraft
So, Interest on Overdraft A/c is to be debited. Bank balance of Rs. 50L
60L require
Withdraw 60L??
Yes, Over the limit (Overdraft)
Overdrawn amt of Rs. 10L (60
Interest on Overdraft of Rs. 10
us -» Debit the receiver -> So, Bank A/c is to be debited.
ains So, Interest on Investments A/c is to be credited.

nk gave benefit to the business Credit the giver -» So, Bank A/c is to be credited.
» So, Insurance Premium A/c is to be debited.

s out - Cash A/c is to be credited.

s by Theft A/c is to be debited.

10,000

ver - So, Kumar’s A/c is to be credited.

n - So, Purchases A/c (Goods A/c) is to be debited.
es out -» So, Cash A/c is to be credited.

er -> So, Ravi’s A/c is to be debited.

s out -> So, Sales A/c (Goods A/c) is to be credited.
n -» So, Cash A/c is to be debited.
 Additional Note:
s out -» So, Cash A/c is to be credLife Insurance Premium - On life of Propietor (Personal Exp of owner is paid by business) - Dr Drawings A
onal expenses of the proprietor ->Insurance Premium - On Assets of Business - Business Expense - Dr Expense A/c

Income tax for Sole-Trader Business - Personal Exp - Drawings A/c should be debited
Income tax for Other Business(Partnership or Companies) - Business Exp - Income Tax Expense A/c shoul
The above -concept is derived from The Income Tax Act, 1961

So, Cash A/c is to be credited.

penses & losses – So, Rent Salaries & Postage Accounts are to be debited individually.

goes out -» So, Purchases A/c is to be credited.

e a/c is to be debited.

5,000

debit balance of Machinery A/c is to be decreased -> So, Machinery A/c is to be credited.
reciation A/c is to be debited.

Additional Note: Accrual Accounts

Asset/Liability?
Asset Debit Other Aspect Credit - Expense A/c / Income A/c
Liability Credit Other Aspect Debit - Expense A/c / Income A/c
e(Payment).
Additional Note:
Bank Overdraft
Bank balance of Rs. 50L
60L require
Withdraw 60L??
Yes, Over the limit (Overdraft)
Overdrawn amt of Rs. 10L (60-50), is repayable to Bank (Liability)
Interest on Overdraft of Rs. 10L is an Expense
id by business) - Dr Drawings A/c

Income Tax Expense A/c should be debited

A/c / Income A/c

/c / Income A/c
Unit - 2: LEDGER
ü All business transactions are recorded in the books of accounts in two stages.
ü After recording the transactions in the journal, recorded entries are classified and grouped into by preparation of accounts an
ü Ledger is the second and final accounting record (Book)
ü Ledger is a book which contains various accounts which are mentioned in the Journal. It is a set of accounts.
ü Leger is a register, having a number of pages, which are numbered consecutively.
ü One page in the ledger is usually allotted to one account.
ü Thus ledger is a collection of all accounts debited or credited in the journal. It contains records of all transactions permanent
ü As the ledger is the ultimate destination of all transactions, it is called “Book of Final Entry”.
ü It is the Principal Book of accounts because it helps us in achieving the objectives of accounting (Final Accounts).

POSTING: Separate account is opened in ledger for each transaction there in the journal and all transactions are posted to resp

Meaning of Posting: Posting is the process of transferring the transactions recorded in the books of original entry (Journal) in
opened in the ledger. It may be done daily, weekly, fortnightly or monthly according to the convenience and require

Process of Posting

Case I J.E: One debit and one credit:

Format of Journal

Date Particulars Ledger Folio Number Debit Credit

7/10/2019 Purchase A/c Dr 100

To Cash A/c 100
(Being ….)
7/12/2019 Adv Expe A/c Dr 10
To Purchases A/c 10
(Being ….)

Case II J.E: More than one debit and only one credit

Date Particulars Debit Credit

7/10/2019 Salaries A/c Dr 100
Rent A/c Dr 50
To Cash A/c 150
(Being ….)
Case III —> J.E: Only one debit and more than one credit
Date Particulars Debit Credit
7/10/2019 Mohan A/c Dr 100
To Cash A/c 90
To Discount Received A/c 10
(Being ….)

Case IV J.E: More than one debit and more than one credit - Transaction during the year
Date Particulars Debit Credit
7/10/2019 Building A/c Dr 100
Land A/c Dr 300
To Cash A/c 50
To Loan/Creditor A/c 350
(Being ….)

Case V J.E: More than one debit and more than one credit - Opening JE
Date Particulars Debit Credit
7/10/2019 Building A/c Dr 100
Land A/c Dr 300
To Capital A/c 50
To Loan/Creditor A/c 350
(Being ….)

BALANCING OF ACCOUNTS:
Meaning of Balancing of Accounts: At the end of the each month or year or any particular day it may be necessary to ascertai
Balancing may be defined as “the process of finding the difference between the total of debits and total of credits of an accou
difference in the lighter / lesser side, so that the total of two sides becomes equal”.

1. Balancing Procedure:
Balance of an account is the difference between the total of debit and total of credit appearing in an account.
It may be a debit balance or a credit balance or a nil balance.

If the total of debit side is more than the total of credit side, the difference is known as “debit balance”. •
If the total of credit side is more than the total of debit side, the difference is known as “credit balance”.
If the total of debit side is equal to the total of credit side, then the account shows “zero balance” or “nil balance”.

Types of Accounts that are Balanced: Normally, Personal Accounts and Real Accounts are balanced. Nominal Accounts are
closed by transferring to Trading and Profit & Loss Account. However, Nominal accounts are also balanced for the purpose of p

Significance of Balancing: Balancing of an account is necessary to ascertain the net effect of all transactions posted to that acc
These balances are useful for the preparation of Trial Balance and Final Accounts.

Distinction between Journal and Ledger: Journal differs from the Ledger in the following respects:
Basis of
Journal Ledger
Distinction
It is Book of original or prime It is book of final or
1. Nature of Book
entry secondary entry.
 It is prepared on the basis of
2. Basis for It is prepared on the basis of
source documents of
Preparation Journal.
transactions
3. Stage > of Recording in the journal is the Recording in the ledger is
recording first stage the second stage
It is prepared to know the net
It is prepared to record all
4. Object transactions in chronological effect of various transactions
order. affecting a particular
account.
In Ledger there are identical
In journal there are five
four columns on debit side
columns
and credit side -
5. Format (1) Date (2) Particulars (3)
(1)Date (2) Particulars (3)
Ledger Folio (4) Debit (5)
Folio
Credit
(4) Amount
All ledger accounts (except
Journal is not
6. Balancing nominal account) are
balanced.
balanced in the ledger.
Narration is
7. Narration written for each Narration is not necessary.
entry.
The process of
The process of recording in
recording in
8. Name of the process of recordi the Ledger is called
journal is called
“Posting”.
“Journalising”.
Journal directly
Ledger serves the basis for
does not serve as
the preparation of final
9. Basis of preparation of Final basis for the
accounts. So it is called
preparation of
“Principal Book”.
final accounts.

CLASSIFICATION OF LEDGER ACCOUNTS:

The number of transactions depends on size and volume of business. When the firm is small, the no. of transactions are limited
the no. of transactions are more. The enterprises having large volume of transactions will divide their ledgers into:

1. Trade Receivables Ledger (or) Sales Ledger (or) Sold Ledger (or) Customers Ledger (or) Receivables Ledger (or) Deb
the accounts of all the customers (Trade receivables, who regularly purchase goods from the business on credit) are maintained
relating to each customer is posted to their respective accounts. It is easy to ascertain the amount due from each customer at an
The Trade Receivables’ Ledger shows debit balance (Due from customers).

2. Trade Payables’ Ledger (or) Purchases Ledger (or) Bought Ledger (or) Suppliers Ledger (or) Payables Ledger (or) C
In this ledger, the accounts of all the suppliers (trade payables, from whom the business purchases the goods on credit are main
All transactions relating to each supplier is posted to their respective accounts. It is easy to ascertain the amount payable to eac
The Trade Payables’ Ledger shows credit balance (Due to suppliers).

3. General Ledger (or) Nominal Ledger (or) Main Ledger (or) Principal Ledger (or) Impersonal Ledger: This ledger con
other than the accounts of trade debtors and trade creditors. In this ledger, all accounts related to the assets, incomes, expen
Ex: Machinery A/c, Commission A/c and Discount A/c etc.
d into by preparation of accounts and the book, which contains all set of accounts (viz. personal, real and nominal accounts), is known as Le

s a set of accounts.

ecords of all transactions permanently in a summarized and classified form.

ounting (Final Accounts).

d all transactions are posted to respective ledger accounts

books of original entry (Journal) in the concerned accounts

ding to the convenience and requirements of the business.

Format of Ledger
Dr Purchase A/c
Journal
Date Particulars Folio Amt Date
Number
7/10/2019 To Cash A/c 100 7/12/2019

Dr Cash A/c
Journal
Date Particulars Folio Amt Date
Number
7/10/2019

Dr Salaries A/c
Date Particulars Amt Date
7/10/2019 To Cash A/c 100

Dr Rent A/c
Date Particulars Amt Date
7/10/2019 To Cash A/c 50
 Dr Cash A/c
Date Particulars Amt Date
7/10/2019

7/10/2019

Dr Mohan A/c
Date Particulars Amt Date
7/10/2019 To Cash A/c 90
7/10/2019 To DR A/c 10

Dr Cash A/c
Date Particulars Amt Date
7/10/2019

Dr DR A/c
Date Particulars Amt Date
7/10/2019

Dr Building A/c
Date Particulars Amt Date
7/10/2019 To Sundries 100
(It is not an Account)

Dr Building A/c
Date Particulars Amt Date
7/10/2019 To Balance b/d 100
(It is not an Account)

day it may be necessary to ascertain the balance in an account.

bits and total of credits of an account and writing the
ng in an account. Cash A/c
Date Particulars Amt Date Particulars
500
it balance”. • 600
dit balance”. 1000
nce” or “nil balance”. 500
By Balance c/d
2600
To Balance b/d 1600
Debit Balance - Opening Balance

Opening Balances
a) Debit Balance - On Debit Side - To Balance b/d
b) Credit Balance -On Credit side - By Balance b/d

Closing Balances
a) Debit Balance - On Credit Side - By Balance c/d
b) Credit Balance -On Debit side - To Balance c/d

e balanced. Nominal Accounts are not usually balanced but are

e also balanced for the purpose of preparing the Trial Balance.
Salaries A/c
Date Particulars Amt Date Particulars
100
100
100
100
100
100
100
100
100
100
100
100
By P&L A/c
1200 Salaries A/c is closed
of all transactions posted to that account during a given period.
, the no. of transactions are limited, when the firm is large,
vide their ledgers into:

r (or) Receivables Ledger (or) Debtors Ledger: In this ledger

e business on credit) are maintained, all transactions
ount due from each customer at any point of time.

edger (or) Payables Ledger (or) Creditors Ledger:

chases the goods on credit are maintained).
ascertain the amount payable to each supplier at any point of time.

mpersonal Ledger: This ledger contains all types of accounts

ated to the assets, incomes, expenses are maintained.
accounts), is known as Ledger.

Cr
Journal
Particulars Folio Amt
Number
By Adv Exp A/c 10

Cr
Journal
Particulars Folio Amt
Number
By Purchases A/c 100

Cr
Particulars Amt

Cr
Particulars Amt
 Cr
Particulars Amt
By Salaries A/c 100

By Rent A/c 50

Cr
Particulars Amt

Cr
Particulars Amt
By Mohan A/c 90

Cr
Particulars Amt
By Mohan A/c 10

Cr
Particulars Amt

Cr
Particulars Amt
Amt
300
700

1600 Balance of Cash A/c - Debit Balance - Closing balance

2600

Amt

1200
1200
UNIT 3: Trial Balance
It is a statement in which Closing Balances of ALL ledger Accounts are disclosed
Closing Bal can be Debit Bal or Credit Bal
It is a summary of Ledger Book
It can be prepared at any given point of time. However preparatio of T/B is mandatory at the end of the year (before preparati

TWO methods of Preparation of T/B

Format
I) Balance Method
Particulars (Name of Ledger Account) Debit Bal Credit Bal
Debtors 500

II) Total Method

Total of Total of
Particulars (Name of Ledger Account) Debits Credits
Debtors 4000 3500

Trail Balance should tally

However in case of any Errors, Trial Balance may not tally
Adjusted Trail Balance
Particulars (Name of Ledger Account) Debit Bal Credit Bal
Land 5,000
P&M 2,500
Purchases 5,000
Salaries 2,000
Baddebts 100
Debtors 600
Capital 6,000
Sales 8,000
Creditors 1,100
Suspense A/c 100 Credit Balance - Total of Credit column is lower
15,200 15,200 -

Suspense A/c
1. Which Balance?
Debit Bal or Credit Bal
Debit Bal - If Total of Debit Bal column is lower
Credit Bal - If Total of Credit Bal Column is lower
2. Nature of Suspense?
No Specific nature
It cab be Personal/Real/Nominal or any combination
3. Suspense Account is a Temporary Account
Once all errors are identified and rectified Suspense account will be Automatically Closed

OBJECTIVES OF PREPARING TRIAL BALANCE:

A Trial Balance is prepared with the following objectives:

1. To check arithmetical accuracy of books of accounts: A Trial Balance is prepared with the prime objective to check the a
accounts. If the sum total of Debit and Credit columns of Trial Balance is equal, then it is assumed that the posting to the ledge
This is because as per Double Entry System or Dual Aspect - for every debit there is credit of equal amount.

2. To detect Errors: If Trial Balance does not agree, it means that some errors in recording or posting or balancing of account
The steps are taken to locate and rectify the errors.

3. Connecting Link: Another objective of preparing a Trial Balance is to use it as a connecting link between ledger and final a
Balance is prepared after the ledger accounts balances are ascertained and before the preparation of final accounts.

4. To facilitate Preparation of financial statements: A Trial Balance is a consolidated statement of balances of accounts on a
preparation of financial statements at the close of the period. Trading, Profit and Loss account and Balance Sheet are prepared
underlying objective is also to help in the preparation of final accounts.

5. Summary of ledger accounts: The Trial Balance serves as a summary of what is contained in the ledger; the ledger may ha
are required in respect of an account.

LIMITATIONS OF TRIAL BALANCE: One should note that the agreement of Trial Balance is not a conclusive proof of ac
spite of the agreement of the Trial Balance, some errors may remain. These may be of the following types:

1. Transaction has not been entered at all in the journal.

2. A wrong amount has been written in both columns of journal.
3. A wrong account has been mentioned in the journal.
4. An entry has not at all been posted in the ledger.
5. Entry is posted twice in the ledger.

Still, the preparation of the Trial Balance is very useful. Without it, the preparation of financial statements would be difficult.
tory at the end of the year (before preparation of final Accounts)

Debtors A/c
Particulars Amt Particulars Amt
To Sales A/c 4000 By Baddebts 100
By Cash or Bank A/c 3400
By Balance c/d 500
4000 4000

Debtors A/c
Particulars Amt Particulars Amt
To Sales A/c 4000 By Baddebts 100
By Cash or Bank A/c 3400
By Balance c/d
4000 4000

ance - Total of Credit column is lower

pared with the prime objective to check the arithmetical accuracy of ledger
en it is assumed that the posting to the ledger accounts is accurate.
is credit of equal amount.

recording or posting or balancing of accounts have taken place.

a connecting link between ledger and final accounts, because, Trial

he preparation of final accounts.

idated statement of balances of accounts on a certain date to facilitate the

oss account and Balance Sheet are prepared on its basis. Thus, its

is contained in the ledger; the ledger may have to be seen only when details

Trial Balance is not a conclusive proof of accuracy. In other words, in

e of the following types:

of financial statements would be difficult.

SUBSIDIARY BOOKS
Name of Book Nature of Transactions
1 Purchases Book Credit Purchase of Goods
2 Sales Book Credit Sale of Goods
3 Purchase Returns Book Those Goods which were Purchased on Credi
4 Sales Returns Book Those Goods which were Sold on Credit are re
5 B/R Book
6 B/P Book
7 Cash Book All Cash(Incl Bank) Transactions
8 Journal Proper Dustbin - All left out Transactions

Formats
1 Purchases Book
Particulars Inward
Date L.F.No.
(Name of the Supplier) Invoice No.

2 Sales Book
Particulars Outward
Date L.F.No.
(Name of the Customer) Invoice No.

3 Purchase Returns Book (or) Returns Outwards Book

Particulars Debit Note
Date L.F.No.
(Name of the Supplier) No.

DEBIT NOTE:
1. It is a document which is sent by the Buyer of goods to their Supplier during Purchase Returns.
2. This document is used by the buyer to communicate to the Supplier (seller) that the Supplier's account is debited b
(at the time of purchase returns)
3. Example: A is the buyer of chocolates from B. A returned some chocolates to B. While returning them, A will Debit
in his ledger. To inform this debit, A will send a Debit Note to B.

4 Sales Returns Book (or) Returns Inward Book

Particulars Credit Note
Date L.F.
(Name of the Customer) No.

CREDIT NOTE:
1. It is a document which is sent by the Seller of goods to their buyer during Sales Returns.
2. This document is used by the seller to communicate to the buyer that the buyer's account is Credited by the seller in h
3. Example: A is the buyer of chocolates from B. B received back some chocolates from A. While returning them, B will cr
4. This is exactly opposite to Debit Note.

8 Journal Proper
 Debit
Date Particulars L.F.
Rs.
 se of Goods

which were Purchased on Credit are returned to Suppliers

which were Sold on Credit are returned from Customers

Bank) Transactions
eft out Transactions

Amount
Rs.

Amount
Rs.

Amount Mohan A/c (Supplier) Dr

Rs. To PR A/c
Mohan A/c is Debited in the Books of Business

se Returns.
e Supplier's account is debited by the buyer in his books

hile returning them, A will Debit B's Account

Amount Sales Returns A/c Dr

Rs. To Arun's A/c (Customer)
Arun's A/c is Credited in the Books of Business

ount is Credited by the seller in his books

. While returning them, B will credit A's A/c in his ledger.
Credit
Rs.
CASH BOOK

TYPES OF CASH BOOK:

There are different types of Cash Book, maintained by business concerns.
They are:
1. Simple / Single Column Cash Book
2. Double Column Cash Book
(a) Containing Cash and Discount columns
(b) Containing Bank and Discount columns
(c) Containing Cash and Bank columns (In very few cases)
3. Triple Column Cash Book
4. Petty Cash Book.

Formats:
1. Simple / Single Column Cash Book

Date Particulars LF No. Amt Date Particulars LF No.

2. Double Column Cash Book

Cash Discount
Date Particulars LF No. Allowed Date Particulars

3. Triple Column Cash Book

Discount
Date Particulars LF No. Cash Bank Allowed Date
itself itself is not an
Cash A/c Bank A/c Account,
it is an Additional info

To Cash A/c C 1000

Points to be considered in the preparation of Cash Book:

1. Opening Balance:
Cash in hand —► Always Debit (written as “To balance b/d”)

Favourable Balance -> Debit Balance (written as “To balance b/d”) - Asset
Bank Balance
Unfavourable (or) Overdraft Balance -Credit Balance (written as “By balance b/d”) - Liability

Discount columns - No Opening Balance

2. Contra Entries: If the double entry of a transaction is complete in the Cash Book itself, such entry is called “Contra Entry".
Cash Account and Bank Account are simultaneously involved in a transaction. Contra Entry will appear in the following cases
a. Cash deposited or paid into Bank
Bank A/c Dr
To Cash A/c
b. Cash withdrawn from Bank for office or business use
Cash A/c Dr 1-May
To Bank A/c 5-May
c. Cheque deposited on a day other than Receipt day
Bank A/c Dr
To Cash A/c

To show contra entry clearly from other transactions, the letter “C” is marked in the L.F. column on both the sides of Cash Boo
also completed on the opposite side itself and no further posting is required in the Ledger.

3. Receipt of Cheques: Business concerns receive cheques from its customers and some incomes may also be received by cheq
sent to bank for collection. Amount of the cheque is recorded as follows.
(a) If the cheque received is deposited in Bank on the same day of its receipt -> Debit side Bank column.
(b) If the cheque received is not deposited in Bank on the same day - Debit side cash column. When this cheque is deposited in
contra entry is recorded, considering it as cash deposited in Bank.

4. Endorsement of Cheque received: When the cheque is received, the amount of the cheque is entered in Cash column on the
cheque is endorsed or transferred to a trade payable (Creditor), the amount of the cheque is entered in the Cash column on the c
Note: Most of the others opined that receipt of a cheque and its endorsement should be recorded in the Cash Columns only on b
Example:
1/5/2020 Cheque received of Rs. 5000 from Ashok (Customer)
Cash A/c Dr
To Ashok A/c

1/8/2020 The above cheque is endorsed to Karim (Supplier)

Karim A/c Dr
To Cash A/c

5. Issue of cheques or payments made by cheques: When a cheque is issued by the business concern or any payment is made
cheque is immediately entered in the Bank Column on the credit side.

6. Dishonour of cheques:
(a) Dishonour of the cheque deposited in Bank - Amount of the cheque is entered in the Bank column on the credit side.
(b) Dishonour of the cheque issued - Amount of the cheque is entered in the Bank column on the debit side.
(c ) Dishonour of endorsed cheque
1/10/2020 Cheque of Ashok which was endorsed to Karim is Dishonoured - Journal Proper
Ashok A/c (Customer) Dr
To Karim A/c (Supplier)

7. Bill Receivable discounted with Bank: After deducting the discount from the Bill Amount, the balance amount is entered i
debit side. However, the discount amount should not be entered in the “Discount Allowed” Column. It will be recorded as a separate entry in
Example:
B/R of Rs. 1000 is Discounted with Bank at Discount of Rs. 50
Bank A/c Dr 950
Discount on Bill A/c Dr 50
To B/R A/c 1000

8. Dishonour of the Bill Receivable discounted with Bank: The full amount of the Bill dishonoured is entered in the Bank

9. Direct deposits by customers into the Bank: The amount so deposited is entered in the Bank column on the debit side.
Bank A/c Dr
To Customer A/c

10. Amounts collected by Bank on behalf of the trader as per his standing instructions: For e.g. Interest on Investments,
Amount collected by Bank is entered in the Bank column on the debit side.
Bank A/c Dr
To Income A/c

11. Amounts paid by Bank on behalf of the trader as per his standing instructions: For e.g. Insurance Premium, Rent etc
entered in the Bank column on the credit side.
Expense A/c Dr
To Bank A/c

12. Bank charges and interest on overdraft - Bank column on the credit side.
Expense A/c Dr
To Bank A/c

13. Interest on Bank deposits - Bank column on the debit side.

Bank A/c Dr
To Int on Deposits A/c
 Amt

Cash Discount
LF No. Received

Discount
Particulars LF No. Cash Bank Received
itself itself is not an
Cash A/c Bank A/c Account,
ditional info it is an Additional info
By Salaries 10 100
By Bank A/c C 1000

/d”) - Liability

try is called “Contra Entry". Contra Entry arises only when

ppear in the following cases only.
n both the sides of Cash Book. It means, ledger posting is

may also be received by cheques. Cheques received are

en this cheque is deposited in Bank on a subsequent date,

ntered in Cash column on the debit side and when the

in the Cash column on the credit side.
n the Cash Columns only on both the sides of Cash Book.

cern or any payment is made by cheque, the amount of the

umn on the credit side.

e balance amount is entered in the Bank column on the

e recorded as a separate entry in the Journal Proper.
oured is entered in the Bank column on the credit side.

column on the debit side.

e.g. Interest on Investments, Dividends on Shares etc. -

nsurance Premium, Rent etc. - Amount paid by Bank is

Petty Cash Book
Two types of Petty Cash Book:
Formats
1) Simple Petty Cash Book
Cash Total
Voucher
Received CBF No. Date Particulars payment
No.
Rs. Rs.
(For Receipts) (For Payments)

2) Analytical Petty Cash Book

Cash Amount
Voucher
Received CBF No. Date Particulars payment
No.
Rs. Rs.
(For Receipts) (For Payments)

Additional Note:
a) Cash Book is Subsidiary and Principal Book of Accounts
b) However Petty Cash Book is not Principal Book of Accounts
 Analysis of Payments
Travelling Misc/
P&S Postage Cartage Freight
Exp Others
Rectification of Errors
I) Errors of Principle
II) Clerical Errors
A) Errors of Omission
a) Complete Omission
b) Partial Omission
B) Errors of Commission
a) Posting Errors
b) Casting Errors
c) Carry Forward Errors
d) Duplication Errors
C) Compensating Errors

I) Errors of Principle
It arises when a financial transaction is recorded in the books in an incorrect manner i.e.
Meaning
Journal Entry is not as per the accountant Principles.
Capital Expenditure is treated as revenue expenditure or vice versa, E.g. Repairs to
Example machinery wrongly treated as capital expenditure and debited to Machinery account
instead of Machinery Repairs A/c
They may be analyzed into –
· Errors which affect profits: e.g. Treating Rent Paid as a Debtor instead of as
Expenses, or when capital Expenditure is treated as revenue and debited to P & L
Types Account.

· Errors which do not affect profits: e.g. Manufacturing Wages (Trading A/c - Direct
Exp) posted to Trade Expenses Account (P&L A/c - Indirect Exp) or wrong classification
of assets or liabilities.
Stage Such errors are normally committed while recording in the Journal
Effect on T.B Such errors WILL NOT affect the Trial Balance (T/B Agrees or tallies)
Errors of principle, which involve income and expenditure accounts, e.g. wrong
Effect on profits
distinction between capital and revenue expenditure, will affect profit.

II) A) Errors of Omission

Meaning Error of Omission means that a transaction is not recorded / posted / transferred either wholly or parti
Types They may be further analyzed into --
Partial Omission
(a) One aspect of the transaction, either debit or credit, is omitted to be recorded
(Journal) / posted (ledger)
(b) Trial balance will not agree
(c) Arises from posting errors – one-sided posting and omission of other side entry
(a) Complete Omission (i) While recording in Journal (ii) Posting to Leger
Stage
(b)Partial Omission: (i) While posting to ledger
(a) Complete Omission – will NOT affect the Trial balance (As both aspects of equal amounts omitted)
Effect on T.B
(b) Partial Omission in posting – will affect the Trial balance (as one of the aspects are recorded)
 The effect of errors of omission on Profit cannot be generalized. If the errors involve Nominal Acco
Effect on profit
profits are affected.

B) Errors of Commission
A transaction is recorded or Posted wrongly or incorrectly in the books. It also includes
Meaning
all clerical errors during the Account Process.
These may be categorized into –
(a) Posting Errors: wrong account, wrong amount, wrong side, any combination. This
affects Trial Balance except in case of only Wrong Account.
Types and Effect on (b)Casting Errors: wrong totaling or balancing. This affects Trial Balance
T.B (c) Carry Forward Errors: carrying forward a wrong amount, wrong side, wrong account,
any combination. This affects Trial Balance except in case of only Wrong Account.
(d)Duplication Errors: recording the same transaction twice in the original book of entry
and also posting it to the Ledger. This does not affect the Trial Balance (Tally).

The effect of errors of commission on Profit cannot be generalized. If the errors involve
Effect on profit
Nominal Accounts, i.e. income and expenditure items, profits are affected.

C) Compensating Errors
One set of errors on the debit side for a specified amount is counter-balanced by
Meaning another set of errors for the same amount on the credit side. Due to this, the Trial
Balance is not affected (Tally).
· It is difficult to detect as such. It may or may not affect the profit.
· If the Original Error and the Compensating Error both arise in Incomes / Expenses
Accounts, the profit will not be affected, but if one arises in a Revenue Account and the
other in an Asset or Liability account, although the Trial balance will agree, profit will be
incorrectly stated.

· Such errors arises in various ways, but most frequently casting (totaling), e.g. the
Nature cast of expenditure account may be Rs.9,600 less, and the cost of asset account
Rs.9,600 extra, the profit and the asset being thereby increased improperly.
Effect on T.B Such errors will not affect the Trial Balance
Compensating Errors, which involve Income and Expenditure Accounts, will affect profit.
Effect on profits However if the error occurs in asset and Liability Accounts only, profits may not be
affected
 Repairs on Machinery - Rev

Capital Exp

Machinery Purchased - Capex

Debited Purchases A/c

rred either wholly or partially, in the books of accounts

Complete Omission
Both aspects of the transaction, debit and credit, are
omitted to be recorded (Journal) / posted (Ledger)
Trial Balance will still agree
Arises from omission – either in Journal or in the ledger

f equal amounts omitted)

spects are recorded)
ors involve Nominal Accounts, i.e. income and expenditure items,

Freight A/c Dr

Error of Posting

Cash A/c Dr 100

To A's A/c 100

Credited to B's A/c - 100: Wrong Account Will not Affect T/B - Tally

Credited to A's A/c - 10: Wrong Amount Will Affect T/B - Not Tallies
Debited to A's A/c - 100: Wrong Side Will Affect T/B - Not Tallies
Debited B's A/c - 10: Wrong side, Wrong Account and
Wrong amount Will Affect T/B - Not Tallies

Purchases A/c is debited with Rs. 100 extra and Sales

A/c is credited with Rs. 100 extra; Net impact in T/B is
Nil (tally) - No impact on Profits

Salaries - Total Less 9,600, Total of Debits is lower by 9,600

Land A/c - Total Extra 9,600, Total of Debits is higher by 9,600

Net impact in T/B is Nil, Net Profit is affected

Rent A/c Dr

To Cash A/c

Suresh A/c Dr

To Cash A/c

Freight - Direct Exp

Purchased Goods, on which transportation charges are incurred of Rs. 100

Freight A/c Dr
To Cash A/c

Wrongly debited to Transportation charges instead of Freight A/c

Transportaion charges - Indirect Exp
Transportation Charges A/c Dr

To Cash A/c

Net Profit will be same

The above error of principle will not affect Net Profit
if we treated debtor as creditor then too it is error of principal but TB won't tally

G. Suresh - Customer

P. Suresh - Creditor
Goods sold to G.Suresh wrongly entered in P.Suresh A/c
Correct JE

G.Suresh A/c Dr
To Sales A/c

Wrong JE
P.Suresh A/c Dr
To Sales A/c

Trading and P&L A/c

Particulars Amt Particulars Amt
To Purch 50 By Sales 100
To Wages A/c 10 By Cl.Stock 10
To GP c/d 50
110 110
To Salaries A/c 20 50
To Net Profit 30
50 50

Trading and P&L A/c

Particulars Amt Particulars Amt

To Purch 50 By Sales 100

To Wages A/c By Cl.Stock 10

To GP c/d 60

110 110
To Salaries A/c 20 60

To Trade Expenses 10
To Net Profit 30
60 60
Rectification Process
It Depends on at which stage rectification is done.
There are three Stages(Point of Time) of Rectification Error.
I) Before preparation of Trial Balance
II) After preparation of Trial Balance but before Final Accounts
III) After preparation of Final Accounts (Next Accounting Period)

I) Before preparation of Trial Balance

A)Error is affecting only One Aspect - It is rectified through a Line
e.g. 1) Total of Purchases Book under cast by Rs.90,000
Rectification - On the Debit side of Purchase A/c "To Undercasting of PB Rs. 90,000"
2)Total of Purchases Book Over cast by Rs.110,000
Rectification - On the Credit side of Purchase A/c "By Overcasting of PB Rs. 110,000"

B)Error is affecting both the Aspects - It is rectified through a JE

e.g. Sale of Old Machinery Rs.45,000 to Mohan has been recorded in the Sales Book.
Correct JE Wrong JE
Mohan A/c Dr Mohan A/c Dr
To Machinery A/c To Sales A/c

II) After preparation of Trial Balance but before Final Accounts

Trial Balance is already prepared
If an Error affects Trial Balance (Not Tallied) - Suspense account is created
If an error doesnot affect Trial Balance (Tallied) - Suspense account is not created
All Errors under this Stage are rectified by recording a JE

Type of Errors which results in Type of Errors which does not result in creation of
creation of Suspense A/c in Trial Suspense A/c in Trial Balance - Errors which does
Balance - Errors which affects trail not affect trail Balance (T/B Agrees)
Balance (T/B Does not Agree)

Partial Omission Error of Principle

Posting Error -Others Complete Omission
Casting Errors Posting Error - Wrong Account
Carry forward error - Others Carry forward error - Wrong Account
Duplication Errors
Compensating Errors

The above errors are rectified through The above errors are rectified Without Suspense
Suspense Account (Debited or Account
Credited)
e.g. Total of Purchases Book under cast Sale of Old Machinery Rs.45,000 to Mohan has been
by Rs.90,000 (Casting Error) recorded in the Sales Book. (Posting Error - Wrong
Account)
Rectification JE: Rectification JE:
Purchase A/c Dr 90,000 Sales A/c Dr 45,000
To Suspense A/c 90,000 To Machinery A/c 45,000

Link Between Stage I and Stage II

Stage I Stage II
Through a line Through JE by using other aspect as Suspense A/c
On the Debit side of Purchase A/c "To Purchase A/c Dr
Undercasting of PB Rs. 90,000" To Suspense A/c
On the Credit side of Purchase A/c "By Suspense A/c Dr To
Overcasting of PB Rs. 110,000" Purchase A/c

Through JE Same as Stage I

Sales A/c Dr Sales A/c Dr
To Machinery A/c To Machinery A/c

III) After preparation of Final Accounts (Next Accounting Period)

Link Between Stage II and Stage III

Stage II Stage III
Through JE Through JE, by replacing Nominal A/c if any in Stage
II Rectification Entry with P&L Adjustment A/c
Purchase A/c Dr P&L Adjustment A/c Dr
To Suspense To Suspense A/c
A/c

Sales A/c Dr P&L Adjustment A/c Dr

To Machinery A/c To Machinery A/c

Freight A/c Dr
No JE
To Salaries A/c

Why P&L Adjustment A/c?

Under Stage III - Rectification is done in NY
In PY mistake is in Purchase A/c, now it should be rectified.
But Purch A/c of PY is already closed by transferring to Trading, P&L A/c
To rectify the PY mistakes, Now, it cannot be re-opened.
Mistake in Purchase A/c has resulted mistake in Net Profit
Now this Net Profit should be rectified - Adjust Net Profit
Rectification will be done through P&L Adjustment A/c and closing Balance in P&L Adj A/c will be transferred to Capital A/c

SUMMARY of Rectification Process:

Link Between Stage I, Stage II and Stage III
Stage I Stage II

Single Aspect Error: Through a line Through JE by using other aspect as Suspense A/c

EXAMPLE: On the Debit side of Purchase A/c Dr

Purchase A/c "To Undercasting of PB To Suspense A/c
Rs. 90,000"

Error is in both Aspects: Through JE Same as Stage I

Example:
Sales A/c Dr Sales A/c Dr
To Machinery A/c To Machinery A/c
 Accounting year ends on 31/12
March - Error
identified in October -
Such error will be rectified before pre

Accounting year ends on 31/12

March - Error
Prepared T/B as on 31/12, T/B is not
Such errors will be rectified before p

Accounting year ends on 31/12

March - Error
Prepared T/B as on 31/12, T/B is not
We are unable to identify errors to re
In this case, Final Accounts will be pr
In Subsequent years, we will try to id

e.g. 1) Total of Purchases Book under cast by Rs.90,000

Rectification JE
Sales A/c Dr
To Machinery A/c
 Stage III
PY, FS
Suspense?
Disclose it in B/S and carry forward to NY
It should be closed only on rectification of errors
Discl in T,P&L A/c - No
If it is disclosed in T,P&L A/c, then it will be closed and we cannot carry forward t

Adj A/c will be transferred to Capital A/c

Stage III
Through JE, by replacing Nominal A/c if any
in Stage II Rectification Entry with P&L
Adjustment A/c
P&L Adjustment A/c Dr
To Suspense A/c

Through JE, by replacing Nominal A/c if any

in Stage II Rectification Entry with P&L
Adjustment A/c

P&L Adjustment A/c Dr

To Machinery A/c
ng year ends on 31/12

in October -
r will be rectified before preparation of T/B - STAGE I

ng year ends on 31/12

T/B as on 31/12, T/B is not allied - Errors

rs will be rectified before preparation of Final Accounts - STAGE II

ng year ends on 31/12

T/B as on 31/12, T/B is not allied - Errors

nable to identify errors to rectify
e, Final Accounts will be prepared knowing that there are errors
uent years, we will try to identify and rectify errors - STAGE III

under cast by Rs.90,000 PB

Part Amt
Supplier names 200,000
390,000
400,000
100,000
1,090,000

Total of Purchases Book under cast by Rs.90,000

PB
Part Amt
Supplier names 200,000
390,000
400,000
100,000
1,000,000

2)Total of Purchases Book Over cast by Rs.110,000

PB
Part Amt
Supplier names 200,000
390,000
400,000
100,000
1,200,000
d we cannot carry forward to NY
 Purchases A/c
Part Amt Part Amt
1,090,000

Purchases A/c
Part Amt Part Amt
1,000,000
To Undercasting of PB 90,000
Individual amounts are credited to individual supplier accounts, they are posted correctly

Purchases A/c
Part Amt Part Amt
1,200,000 By Overcasting of PB 110,000
Bank Reconciliation Statement [BRS]

CB (Bank Column of CB - Bank A/c)

Date Particulars Amt Date
12/30/2019 To Balance b/d 100
12/31/2019 To Customer A/c 50
(Deposit of cheque) 12/31/2019
150

PB (Customer A/c in the Books of Bank)

12/30/2019
12/31/2019 To Balance c/d 100
100
1/1/2020
1/2/2020

Reasons behind Differences b/w CB Bal and PB Bal

All items of differences can be classified in to 5 types
1) Cheques Deposited but not Collected by Bank (CB is higher than PB)
2) Cheques Issued but not Presented for Payment (PB is higher than CB)
3) Direct Transactions at Bank
4) Errors in CB
5) Errors in PB

(2)Cheques Issued but not Presented for Payment

CB (Bank Column of CB)

Date Particulars Amt Date
12/30/2019 To Balance b/d 100 12/31/2019

12/31/2019
100

PB
Date Particulars Amt Date
12/30/2019
12/31/2019 To Balance c/d 100
100
1/1/2020
1/2/2020 On Payment 20
(3) Direct Transactions at Bank
Bank Charges - Expense
CB (Bank Column of CB)
Date Particulars Amt Date
12/30/2019 To Balance b/d 100

12/31/2019
100

PB
Date Particulars Amt Date
12/31/2019 Bank Charges 10 12/30/2019
12/31/2019 To Balance c/d 90
100

Interest on Deposits - Income

CB (Bank Column of CB)
Date Particulars Amt Date
12/30/2019 To Balance b/d 100

12/31/2019
100

PB
Date Particulars Amt Date
12/30/2019
12/31/2019 To Balance c/d 110 12/31/2019
110

(4) Errors in CB
Error of Posting - Paid in Cash but credited wrongly in Bank Column of CB
CB (Bank Column of CB)
Date Particulars Amt Date
12/30/2019 To Balance b/d 100 12/31/2019
12/31/2019
100

PB
Date Particulars Amt Date
12/30/2019
12/31/2019 To Balance c/d 100
100

(6) Errors in PB
Error of Omission - Payment by Bank against a Cheque Issued is not recorded in PB
CB (Bank Column of CB)
Date Particulars Amt Date
12/25/2019 To Balance b/d 100 12/26/2019

12/31/2019
100

Bank has paid the amount on 30/12/2019, but omitted to record

PB
Date Particulars Amt Date
12/25/2019
12/31/2019 To Balance c/d 100
100

Identification of 'Difference Transaction' to be Added or Deducted in BRS

Step 1: Identify which Book balance will be higher because of Difference Transaction
Step 2: Prepare a Two-Row Table having CB and PB as rows and by denoting Higher Bal Book as "A" and Lower Bal Boo
1 2 3
CB A L A
PB L A L

Step 3: Selecting one of the rows for preparation of BRS

In Case of Favourable Balance

Case I Balance as per CB is given in Question Balance as per PB is requirement? PB Row
Case II Balance as per PB is given in Question Balance as per CB is requirement? CB Row
Summary: Requirement will be the Row to be Selected

In Case of Unfavourable Balance - OD

Case I OD Balance as per CB is given in Question Balance as per PB is requirement? CB Row
Case II OD Balance as per PB is given in Question Balance as per CB is requirement? PB Row
Summary: Given will be the Row to be Selected
Particulars Amt

By Balance c/d 150 Balance at Bank

150

By Balance b/d 100

100
By Balance b/d 100
On Collection 50

Particulars Amt
By Creditor A/c 20
(Cheque Issued)
By Balance c/d 80
100

Particulars Amt
By Balance b/d 100

100
By Balance b/d 100
 Bank Charges is 10
Particulars Amt Bank Balance decreases
CB Credit
PB Debit
By Balance c/d 100
100

Particulars Amt
By Balance b/d 100

100

Int on Deposits
Bank Balance Increases
Particulars Amt CB Debit
PB Credit

By Balance c/d 100

100

Particulars Amt
By Balance b/d 100
Int on Dep 10
110

Particulars Amt
By Creditor (Cash) 15
By Balance c/d 85
100

Particulars Amt
By Balance b/d 100

100
 Particulars Amt
By Creditor 15
(Cheque Issued)
By Balance c/d 85
100

Particulars Amt
By Balance b/d 100

100

ok as "A" and Lower Bal Book as "L"

It is a statement in which all items of differences in CB Bal and PB Bal will be disclosed
BRS as on 31/12/2019
Particulars Amt
Bal as per CB 150
Less: Cheques Deposited but not Collected by Bank -50
Bal as per PB 100

Alternatively,
Particulars Amt
Bal as per PB 100
Add: Cheques Deposited but not Collected by Bank 50
Bal as per CB 150

'n' no. of reasons for differences in CB and PB Balances

And all these items should be disclosed in BRS as either by Adding (Add) or by Deducting (Less)
BRS can be prepared at any point of time, however preparation of BRS is compulsory at the end of the year
nce decreases

nce Increases
Example:
1) Cheque of Rs. 100 deposited but not Collected
2) Cheque of Rs. 50 Issued but not presented for payment
3) Bank Charges of Rs. 10 recorded only in PB
Balance as per CB is Rs. 500 and find out balance as per PB?
BRS as on 31/12/2019
Particulars Amt
Balance as per CB 500
-100
50
-10
Balance as per PB 440
B Bal will be disclosed

ng (Add) or by Deducting (Less)

of BRS is compulsory at the end of the year
Balance as per PB is Rs. 440 and find out balance as per CB?
BRS as on 31/12/2019
Particulars Amt
Balance as per PB 440
100
-50
10
Balance as per CB 500
 CB (Bank Column of CB)
Particulars Amt
To Balance b/d xxx
(Cash at Bank - Debit Balance
- Favourable Bal - Asset)

Items which Increases Bank Balance

e.g. Cheque Deposited
Directly Collection by Bank
B/R Discounted with Bank
Dishonour of Cheques Issued
Int on Deposits
Cash Deposited in Bank/Paid in to Bank

To Balance c/d xxx

(Over draft - Credit Bal -
Unfavourable Bal - Liability)

PB (Customer A/c in the Books of Bank) or Bank Statement (Loose Papers) - Mirror image o
Particulars Amt
To Balance b/d xxx
(Over draft - Debit Bal -
Unfavourable Bal - Asset)

Items which Decrease Bank Balance

e.g. Cheques Issued
Directly Paid by Bank
Discounted B/R Dishonoured
Dishonour of Cheques Deposited
Cash withdrawn from Bank for Office/Personal use
Bank Charges or any other Exp

To Balance c/d xxx

(Cash at Bank - Credit Balance
- Favourable Bal - Liability)
CB (Bank Column of CB)
Particulars Amt
By Balance b/d xxx
(Over draft - Credit Bal -
Unfavourable Bal - Liability)

Items which Decrease Bank Balance

e.g. Cheques Issued
Directly Paid by Bank
Discounted B/R Dishonoured
Dishonour of Cheques Deposited
Cash withdrawn from Bank for Office/Personal use
Bank Charges or any other Exp

By Balance c/d xxx

(Cash at Bank - Debit Balance
- Favourable Bal - Asset)

nk) or Bank Statement (Loose Papers) - Mirror image of CB

Particulars Amt
By Balance b/d xxx
(Cash at Bank - Credit Balance
- Favourable Bal - Liability)

Items which Increases Bank Balance

e.g. Cheque Deposited
Directly Collection by Bank
B/R Discounted with Bank
Dishonour of Cheques Issued
Int on Deposits
Cash Deposited in Bank/Paid in to Bank

By Balance c/d xxx

(Over draft - Debit Bal -
Unfavourable Bal - Asset)
Preparation of BRS with (after) Adjusted Cash Book
BRS WithoBRS With ACB
1) Cheques Deposited but not Collected by Bank (CB is higher than PB) BRS BRS
2) Cheques Issued but not Presented for Payment (PB is higher than CB) BRS BRS
3) Direct Transactions at Bank BRS ACB
4) Errors in CB BRS ACB
5) Errors in PB BRS BRS

Note: First CB Bal will be adjusted with transactions of (3) and (4), and adjusted balance will be considrerd for preparation
and in BRS, the remaining transactions will be disclosed (i.e. 1,2 and 5)
 BRS With ACB

l be considrerd for preparation of BRS

Identification of Transactions which lead to difference in CB Bal with PB Bal

Case I:

Case II:
Identification of Transactions which lead to difference in CB Bal with PB Bal

By Comparing Same month CB(March) and PB(March)

Compare Debit side of CB with Credit side of PB, and identify Missing Transaction
Compare Credit side of CB with Debit side of PB, and identify MissingTransaction appearing in both.

By Comparing different months CB(March) and PB(April) - Problem No:9

Compare Debit side of CB with Credit side of PB, and identify Same Transaction appearing in both.
Compare Credit side of CB with Debit side of PB, and identify Same Transaction appearing in both.
March
CB - Deposit 100 Mr. A

March
PB - Deposit 100 Mr. A is not available
In CB it is available and in PB it is missing

CB PB
Dr Cr
Cr Dr
Inventories - AS 2: Valuation of Inventories
Inventories (Stock) Includes:
Raw Materials (Direct Material)
WIP/SFG/Intermediary
Finished Goods(manufacturing) / Stock-in-Trade(Trading)
Consumables
Others

Note: At Foundation level, Valuation of RM and FG/Stock-in-Trade are only covered

Effect of wrong valuation of inventory on Profits, Balance Sheet position and Liquidity
Particulars
a) Closing Stock
i) Overstated
ii) Understated

b) Opening Stock
i) Overstated
ii) Understated

Valuation Rule:
Inventories should be valued at Cost or NRV whichever is lower
I) Computation of Cost of Inventories
The Cost of Inventories shall comprise all –
A) Costs of Purchase
B) Costs of Conversion
C) Other Costs incurred in bringing the inventories to their present location and condition

A) Costs of Purchase
Particulars
a) Purchase Price including duties and taxes (excluding tax refunds / credits)
b) Add: (i) Freight Inwards (on Purchase of Goods)
(ii) Other Expenditure directly attributable to the purchase (See
Note)

c) Less: Trade Discounts, Rebates, Duty Drawbacks and other similar items

Costs of Purchase
Note: Examples of expenditure directly attributable for purchases are –
(a) Cost of Containers, (b) Transit Insurance, (c) Buying Commission
where purchase of raw-material is possible only through buying agents.

B) Costs of Conversion
It includes:
i) Costs directly related to the units of production
e.g. Direct Labour (Wages-Direct Expense), i.e. cost of works who are directly associated in production process.
ii) Variable Production Overheads
e.g. Indirect Costs which vary directly with the volume of output, e.g. Indirect Materials(cost for packing of goods)
iii) Fixed Production Overheads
e.g. Indirect Costs which remain relatively constant regardless of the level of output, e.g. Factory Rent, Salary, etc.

C) Other Costs incurred in bringing the inventories to their present location and condition
It Includes:
i) Costs of designing products for specific customers.
ii) Non-Production Overheads incurred for bringing inventories to their present location. - Transportation Charges incurred in b

It Excludes:
i) Interest and other Borrowing Costs.
ii) Overheads incurred after inventories are brought to their present location and condition e.g. All Godown Expenses

Summary: Entire Cost Incurred on the Inventories until they reached Sale Point(Godown) are included under Cost of Invento

Exclusions from Cost

The following costs are excluded in determining the Cost of Inventories –
Nature of Costs

1. Abnormal Costs(Loss) of waste materials, labour or other production

costs.

2. Storage Costs (or) Carrying Cost

3. Administrative Overheads which do not contribute to bringing the

inventories to their present location and condition

4. Selling and Distribution Costs.

5) Interest and other Borrowing Costs.

Net Realizable(Sale) Value

a)Estimated Selling Price in the ordinary course of business
b) Less: i)Estimated Cost of Completion (WIP/SFG)
ii) Estimated Costs necessary to make the sale(Selling Exp)
c) Net Realizable Value (NRV)
 Held for production
In the process of Production
Held for Sale
Consumed in the process of production or while/for rendering Services

ade are only covered

eet position and Liquidity

Effect on Profits Effect on Balance sheet Effect on Liquidity

Overstated(Increase) Higher Current Asset High Liquidity

Understated (Decrease) Lower Current Asset Low Liquidity

Understated (Decrease) NA NA
Overstated(Increase) NA NA

sent location and condition

Amount
unds / credits) xxx
xxx
xxx
xxx

imilar items (xxx)

xxx

who are directly associated in production process.

ut, e.g. Indirect Materials(cost for packing of goods)

of the level of output, e.g. Factory Rent, Salary, etc.

esent location and condition

s to their present location. - Transportation Charges incurred in bringing the FG from Factory to Godown

esent location and condition e.g. All Godown Expenses

eached Sale Point(Godown) are included under Cost of Inventories

Explanation / Exception
Reason: Inefficiency does not make a
product more valuable by means of
higher cost, hence excluded.

Exception: They are includible when

Storage Costs are necessary in the
production process, prior to a further
production stage.

Exception: They are includible when

such costs contribute to bringing the
inventories to their present location
and condition.

Reason: These are incurred after

bringing the inventories to their
present location and condition and
hence excluded.

Reason: These are not incurred for

bringing the inventories to their
present location and condition and
hence excluded. They are for Financial
needs

xxx
(xxx)
(xxx)
XXX
 12/31/2019 End of the year
Cost 100 100
NRV 90 105
Value of Inv 90 100
(Whichever is lower)
Based on Conservatism Future Loss 10 Future Profit 5
Accounted now Ignore now
Basis of Valuation of Inventories
Inventories are usually written down to Net Realizable Value on an item-by-item(Product by Product) basis (Case-II).
They should not be valued at Net Realizable Value on –
1. Wholestic basis, i.e all items of inventory taken together, and
2. Classification basis, e.g. all Finished Goods, or all inventories in a particular business segment.
Exceptions (Case I): In special circumstances, it may be appropriate to group similar or related items, viz.
1. Inventory items relating to the same product line that have similar purposes or end uses,
2. Produced and marketed in the same geographical area, and
3. Cannot be practically evaluated separately from other items in the product line.

A
Example: Tel and AP

S Ltd. deals in 3 products A, B & C, which are neither similar nor interchangeable (Case II). At the
end of a financial year, the Historical Cost and NRV of items of Closing Stock are given below.
Determine the value of Closing Stock.

Net Realizable
Items Historical Cost (in Rs. Lakhs) Value (in
Lakhs)

A 40 28
B 32 32
C 18 24
Case I: Goods are Similar/Interchangeable
(Compare Total Amts) - Exception

Net Realizable
Items Historical Cost (in Rs. Lakhs) Value (in
Lakhs)

A 40 28
B 32 32
C 18 24
90 84
whichever is lower i.e. 84
Case II: Goods are neither Similar nor
Interchangeable (Compare Individual Products)
Cost or
Net Realizable
NRV
Items Historical Cost (in Rs. Lakhs) Value (in
whicheve
Lakhs)
r is lower
A 40 28 28
B 32 32 32
C 18 24 18
78

Different Techniques/Methods/Formula for ascertaining Cost of Inventories

 Historical Cost Methods Other Methods
1. First-In-First-Out (FIFO) 1. Adjusted selling Price or Retail Inventory Method
2. Last-In-First-Out (LIFO) 2. Standard Cost (theory)
3. Simple Average Cost 3. Latest Purchase Price
4. Weighted Average Cost (WAC) 4. Substitution Price
5. Base Stock 5. Inflated Price/Adhoc, Price etc.

The above methods can be used when the items of Inventories that are ordinarily interchangeable and goods or services are n

Specific Identification method will be used

· For items that are not ordinarily
interchangeable, and
· For goods or services produced & segregated for
specific projects.

Example:
Date of Purchase Qty Rate p.u. Total Cost
1-Jan 100 2 200
10-Jan 100 2.1 210
15-Jan 150 1.8 270
21-Jan 250 2.3 575
27-Jan 200 2.15 430
800 1685

By 31/1 - Qty issued/Sold are 550 units

On 31/1 - Closing units are 250 Units
Compute Cost of 250 Units?

Case I: For suppose goods are segregated and stored at different locations in the godown based on date of purchase
Specific Identification method will be used
Cost of Closing stock as on 31/1 = (30*2.10) + (100*2.30) + (120*2.15) = 551
Date of Purchase Stock available on 31/1 Rate p.u. Cl. Stock
1-Jan 0 2 0
10-Jan 30 2.1 63
15-Jan 0 1.8 0
21-Jan 100 2.3 230
27-Jan 120 2.15 258
250 551

Case II: For suppose all the goods which are purchased are dumped together in the godown
Any one of the 10 methods will be used, wherein certain assumption will be made
uct) basis (Case-II).

Inventories:
RM
B WIP
Tel and AP FG/Stock-in-trade FG - A and B
e and goods or services are not specifically segregated.

on date of purchase
Inventory Taking - Physical Stock Vs Book Stock
Wherever required, the following adjustments are carried out in respect of value of Physical Stock,
to arrive at the Value of Inventory as per the Balance Sheet (Book Stock) –
Value of Physical Stocks on the Closing Date (balance sheet date) xxx
Goods in Transit, i.e. goods in respect of which the Firm has the title and
Add xxx
ownership, but lying with the Transporter / Carrier, pending delivery.
Goods held by Other Entities on our behalf (e.g. Our Stock held by
Add xxx
Agent(Consignee), Sub-Contractor, Job Worker, etc.)
Goods sent on return or approval basis for which confirmation not received
Add xxx
from Customer.
Any goods sold in respect of title has been transferred to the Buyer, but
Less (xxx)
delivery pending at Buyer’s request
Goods held by us on behalf of Other Entities (e.g. As Agent, ass Sub-Contractor,
Less (xxx)
as Job Worker, etc.)
Adjustments required to mark-down defectives / obsolete items, etc. to their
Less (xxx)
NRV, if any.
Value of Stocks as per Balance Sheet - Book Stock xxx

Physical Verification on other than Balance sheet date(31/12/2019)

Case I: Stock Taking before Balance Sheet date (25/12/2019)
a) Physical Stock as on 25/12/2019 xxx
b) Add: Goods Came in during the period of gap for example xxx
i) Purchases
ii) Sales Returns at Cost Price
c) Less: Goods went out during the period of gap for example (xxx)
i) Sales at Cost Price
ii) Purchase Returns
d) Physical Stock as on 31/12/2019 xxx

Case II: Stock Taking after Balance Sheet date (4/1/2020)

a) Physical Stock as on 4/1/2020 xxx
b) Less: Goods Came in during the period of gap for example (xxx)
i) Purchases
ii) Sales Returns at Cost Price
c) Add: Goods went out during the period of gap for example xxx
i) Sales at Cost Price
ii) Purchase Returns
d) Physical Stock as on 31/12/2019 xxx
Chp - 5: Depreciation - AS 10 Property, Plant and Equipment

P&M is Purchased
is being used in the business for manufacture of goods
USE - Value of P&M decreases - Depreciation

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable
efflux of time or obsolescence through technology and market changes.

P&M Cost 1,000,000 Cash Outflow

Useful Life (Estimated) 10 years
Residual Value/Scrap Value (Estimated) is 20,000 (Value of the Asset at the end of it's useful life)
Depreciable Amount 980,000 ( Cost - SV or RV)
This DA should be allocated over 10 years (Useful Life)
980,000/10 y = 98,000 (Depreciation - Non Cash Exp)

Depreciable Asset
Depreciation will be provided on PPE (Tangible Fixed Assets) other than Freehold Land (Depreciable Asset)
Property, plant and equipment (AS 10) are tangible items that:
a) are held by an enterprise –
(i) for use in the production or supply of goods and services,
(ii) for rental to others,
(iii) for administrative purposes,
and not for the purpose of sale in the ordinary course of business (PPE are not Inventories or Goo
b) are expected to be used during more than a period of twelve months

On Intangible Assets, Amortisation will be provided - As per AS 26

Depreciation
1. Definition: Depreciation is –
A Measure of - Arising from -
(a) Natural wear and tear, (a) Use,
(b) Consumption, or (b) Effluxion of time, or
(c) Other loss of value of (c) Obsolescence through technology
Depreciable Asset & market changes

2. Effect: Depreciation refers to a reduction / loss in the utility of a Depreciable asset.

3. Nature: Depreciation is a non-cash expenditure (i.e. it does not result in any cash outflow.)
4. Depreciation vs Amortization: The term “Depreciation” is used in respect of Tangible Fixed assets (PPE), and the term “Am

Accounting for Depreciation

TWO Ways/Methods

I Method: Asset Credit Method

Under this method, Depreciation amount will be credited to Asset a/c
 Because of which Asset Book Value will be decreased, and such decreased BV of Asset will be carr

P&M Cost is 10,00,000

Depreciation is 90,000

JE
1) Providing Depreciation
Depreciation A/c Dr 90,000
To Asset A/c (P&M) 90,000

2) Writing off Depreciation

P&L A/c Dr 90,000
To Depreciation A/c 90,000

Note: Starting point of providing depreciation

Depreciation should be provided from the date when the Asset is ready for use
Example:
P&M is Purchased on 1/1/2019
It is ready for use only from 1/2/2019
It is put to use from 1/3/2019
For the year 2019 - Only for 11 months depreciation will be provided (From Feb to Dec 2019)

II Method: Provision Method

Under this method, Depreciation amount will be not be credited to Asset a/c, it will be Credited to
In this case, Asset will be at it's Cost itself(it will not be decreased).

1) Providing Depreciation
Nominal Depreciation A/c Dr 90,000
Personal To Provision for Depreciation A/c 90,000

2) Writing off Depreciation

P&L A/c Dr 90,000
To Depreciation A/c 90,000

The above two JE can also be combined as follows:

P&L A/c Dr 90,000
To Provision for Depreciation A/c 90,000
Methods of Providing Depreciation
1) SLM/Fixed Instalment method
2) RBM/WDV/DBM
3) Sum of years of Digits Method
4) Machine Hour Method
5) Production Units Method
6) Depletion Method

Excluded
Annuity Method
Sinking Fund Method

Methods of Depreciation
1) Straight Line Method (SLM) or Fixed Installment Method
Depreciation = (Cost - Residual Value)/Useful Life

Rate of Depreciation = (Depreciation/Cost of Asset) *100

P&M Cost 10,00,000

RV is 50,000
Useful Life is 10 years

Computatuion of Depreciation by using Rate of Depreciation:

Depreciation = Cost of Asset * Rate of Depreciation
2)Reducing Balance Method or Written Down Value (WDV) Method or Diminishing Balance Method
Depreciation =
a) First Year: Cost of Asset * Rate of Depreciation
b) Subsequent Years: Opening BV of Asset(after earlier years Depreciation) * Rate of Depreciation
(Opening BV of Asset = Cost - Earlier years Depreciation)

Rate of Depreciation = 1-

where n = Useful life

All the cost incurred to make the Asset Ready for use are Capital Expenditures and should be added to cost of Asset

3) Sum of Digits of Years Method

Deprn p.a. = Depreciable Amt

Example:
Cost 10,00,000
RV 20,000
Depreciable Amt is 980,000
Useful life is 5 years

1st year Dep = 980,000 * (5 years / (1+2+3+4+5) )

= 980,000*5/15 326,667

2nd year Dep = 980,000 * (4 years / (1+2+3+4+5) )

= 980,000*4/15 261,333

3rd year Dep = 980,000 * (3 years / (1+2+3+4+5) )

= 980,000*3/15 196,000

4th year Dep = 980,000 * (2 years / (1+2+3+4+5) )

= 980,000*2/15 130,667

5th year Dep = 980,000 * (1 years / (1+2+3+4+5) )

= 980,000*1/15 65,333

Benefits higher
Dep should be higher
4) Machine Hour Method
Deprn p.a. = Depreciable Amt

For Exapmle
Machine Life is 100,000 hours
Cost is 10,00,000
RV is 50,000
Usage
Year 1 2
No. of hours 30,000 40,000

Depreciation for the First year = (10,00,000 - 50,000) * 30,000/100,000 = 285,000

Depreciation for the Second year = (10,00,000 - 50,000)* 40,000/100,000 = 380,000
Depreciation for the Third year = (10,00,000 - 50,000)* 30,000/100,000 = 285,000

5) Production Units Method

Deprn p.a. = Depreciable Amt

6) Depletion Method
This method is used in the case of Mines, Quarries, Oil Well, etc. containing only a certain estimated quantity of resources / pr

Deprn p.a. = Depreciable Amt

Suitability of different methods of Depreciation

Method Suitability
Used for assets of specified useful life,
1. Straight Line where benefits from Asset are almost
Method same for the entire useful life e.g.
Machinery, Building, Furniture.

Used for assets of specified useful life,

where benefits from Asset are
2. WDV Method Decreasing over useful life. Used
Commonly for Machinery, Plant,
Fixtures, etc.

3. Sum of Digits
Used as a variation of WDV Method
Years Method
Used for Machines whose lifetime can
4. Machine Hour
be measured in terms of hours of
Method
operation (and not in terms of years)
 Used for Machines producing product
5. Production Units
of uniform (Predetermined)
Method
specification.

Used in the case of Mines, Quarries,

6. Depletion
Oil well, et c. containing only a
Method
certain quantity of product / output

Profit/Loss on Sale/Disposal of PPE

Profit or Loss = Sale Proceeds - Carrying Amt(or) Book Value of Asset on the date of Sale/Disposal
Such Profit or Loss will be transferred to P&L A/c
If SP (120) > BV (100) : Profit (20) - Credit P&L A/c
JE
Cash / Bank A/c (SP) 120

To Asset A/c (BV) 100

To Profit on Sale A/c (P&L A/c) (b/f) 20

If SP (90) < BV (100) : Loss (10) - Debit P&L A/c

JE
Cash / Bank A/c (SP) 90
Loss on Sale A/c (P&L A/c) (b/f 10
To Asset A/c (BV) 100

Changes in Method of providing Depreciation, Useful life, Residual Value and Cost
Example for change in cost
On Credit 100
Paid 90
Yet to be paid 10 Waived off by creditor
Initially Asset was capitalised for Rs. 100
Later on Actual cost is reduced to 90

All the above changes are Considered as Change in Accounting Estimates, wherein Prospective Accounting will be done for su
Propsective Accounting - Changes will be considered from now on (from Date of Change)
On the date of Change - Calculate Carrying Amt or BV by Considering Old Factors (Before Change)
Then Provide Depreciation for the period after date of change by using Revised or Changed factors

1/1/2016 DOP
1/1/2019 DOC

Prospective Accounting - All changes will be considered from DOC

Retrospective Accounting - All changes will be considered from DOP
Revaluation of PPE
Land is Purchased 10 years ago at Rs. 10,00,000
Value of Land today is Rs. 25,00,000
Without any revaluation this Land will be disclosed in Balance sheet at Rs. 10,00,000
Revaluation of PPE is an OPTION
In this case Land can be revalued up to Rs. 25,00,000 - called as Revaluation of PPE

Increase in PPE Decrease in PPE

Asset should be debited (IncAsset should be Credited (Decerease)
Profit Loss

Accounting Treatment for Revaluation Profit or Loss

I) First Time Revaluation
a) Profit - Credit it to Revaluation Reserve A/c, it should be disclosed under Liabilities side
PPE A/c Dr
To RR A/c
b) Loss - Debit to P&L A/c
P&L A/c Dr
To PPE A/c

Conservatism
Future lossess - recognised immediately
Future Profits - should not be recognised

II) Subsequent time Revaluation

a) First Time: Profit - Credit it to Revaluation Reserve A/c
Subsequent:
i) Profit - Credit it to Revaluation Reserve A/c
PPE A/c Dr
To RR A/c

ii) Loss - Loss should be debited to Revaluation Reserve A/c to the extent of balance available in
RR A/c Dr
P&L A/c (b/f) Dr
To PPE A/c

b) First Time: Loss - Debit to P&L A/c

Subsequent:
 i) Profit - Profits should be credited to P&L A/c to the extent of previous debits, excess profits if
PPE A/c Dr
To P&L A/c
To RR A/c (b/f)

ii) Loss - Debit to P&L A/c

P&L A/c Dr
To PPE A/c

Example 1: Example 2:
First time profit is 50 - Cr to RR A/c First time Loss is 50 - Dr to P&L
Subsequent time: Subsequent time:
Case 1: Loss is 30 Case 1: Profit is 30
Entire loss debit to RR A/c Entire profit Credit to P&L

Case 2: Loss is 60 Case 2: Profit is 60

Loss of Rs. 50, debit to RR A/c Profit of 50, Credit to P&L A/c
Balance loss of Rs. 10, Debit to P&L A/c Balance profit of 10, Credit to RR A/c

Case 3: Loss is 50
Entire loss debit to RR A/c

JE for Revaluation:
a) Increase in PPE

b) Decrease in PPE

PPE:
P&M 10
Buildings 5
Vehicles 20

Any one of the classess can be selected for revaluation (eg only P&M can be revalued without rev
However within the class of PPE (eg P&M), all individual assets should be revalued (eg all 10 P&M
f value of a depreciable asset arising from use,

e end of it's useful life)

not Inventories or Goods).

PPE), and the term “Amortization” is used in respect of Intangible Assets like Patents, Copyrights, etc.
 BV of Asset will be carried forward to NY by disclosing Asset in Balance sheet

P&M A/c
Part Amt Part
To Bank A/c 1,000,000 By Depreciation A/c
By Balance c/d
1,000,000

Balance sheet
Liab Amt Assets
P&M

Carrying Amt of PPE = Cost of Asset - Depreciation provided

= 10,00,000 - 90,000 = 910,000

m Feb to Dec 2019)

a/c, it will be Credited to Provision for Depreciation A/c

I Year
P&M A/c
Part Amt Part
To Bank 1,000,000
By Bal c/d
1,000,000

Balance sheet
Liab Amt Assets
P&M 10,00,000
Less: Prov. (90,000)

sir instead of deducting can we write provision in liability side

Balance sheet
 Liab Amt Assets
Prov. For Dep 90,000 P&M

The above disclosure is not allowed as per AS - 4

AS 4 says that, all Provisions which are created against an ASSET should be disc
balance sheet by way of deducting it from the respective Asset

II Year
P&M A/c
Part Amt Part
To Bal b/d 1,000,000
By Bal c/d
1,000,000

Balance sheet
Liab Amt Assets
P&M 10,00,000
Less: Prov. (180,000)

= (10,00,000 - 50,000) / 10 95,000

= (95,000 / 10,00,000)*100 9.50%

 1,000,000
2011 250,000
2012 187,500
2013 140,625
2014 105,469
2015

cost of Asset
 3
30,000

uantity of resources / products

 JE if Provision for Depreciation is followed (Method II of Accounting)
Cost of Asset is 150
Total Provision for Dep provided is 50
SP is 120
Bank A/c Dr 120 (Sale Proceeds)
Provision for Depreciation A/c Dr 50 (Total Accumulated Depreciation)
To Asset A/c 150 (cost)
To Profit on Sale of Asset A/c (P&L) 20

nting will be done for such Changes

RV
Old 100
New 80

Cost 1000
Life is 10 years
SLM
Dep = (1000 - 100)/10 = 90
for 3 years it is depreciated
 BV as on DOC - 1/1/2019 = Cost - Cummulative Dep
' = 1000 - (90*3y) = 730

2019 Dep = (730 - 80) / 7

= 93

r Liabilities side

of balance available in RR A/c, excess loss if any should be debited to P&L A/c (Example 1)
debits, excess profits if any should be credited to RR A/c (Example 2)

0 - Dr to P&L

0, Credit to RR A/c

be revalued without revaluing Buildings or Vehicles)

evalued (eg all 10 P&M should be revalued)
Goods Vs Fixed Assets(PPE)
 Amt
90,000
910,000
1,000,000

Amt
910,000 Book Value or Carrying Amt

Provision for Depreciation A/c

Amt Part Amt Part Amt
By Depreciation A/c 90,000
1,000,000 To Bal c/d 90,000
1,000,000 90,000 90,000

Amt
910,000

ability side
 Amt
1,000,000

inst an ASSET should be disclosed in the

ective Asset

Provision for Depreciation A/c

Amt Part Amt Part Amt
By Bal. b/d 90,000
1,000,000 By Depreciation A/c 90,000
1,000,000 To Bal c/d 180,000 (2nd year Depreciation)
180,000 180,000

Amt
820,000
Cost
Cost - Cummulative Dep
Final Accounts of Sole Proprietors
Unit 1: Non-Manufacturing Entities (Trading entities)
Unit 2: Manufacturing Entities

Unit 1: Non-Manufacturing Entities (Trading entities)

Financial Statements of Non-Manuf Entities (ALSO CALLED General Purpose Financial statements) consist of the following –
(a) Statement of Performance -- Trading and Profit and Loss Account,
(b) Statement of Financial Position -- Balance Sheet
(c) Statement of Movement of Funds -- Cash Flow Statement

TRADING ACCOUNT
Gross Profit: - Sale Value of Goods Less Cost of Goods Sold. This Gross Profit is ascertained by preparing the Trading Account. The format

Trading Account of …. for the year ended ……. Journal Entries for Tradin
Particulars Rs. Particulars Rs.
To Opening Stock By Sales (net of Returns)
1
To Purchases (net of Returns) By Abnormal Loss (if any, valued at
cost)
To Direct Expenses like Freight,
Cartage, Octroi, Excise Duty, By Closing stock
Customs Duty, etc.
2
To Gross Profit c/d (Transferred to P By Gross Loss c/d (Transferred to P
& L Account) (b/f) & L Account) (b/f)

Total Total

Freight (or) Carriage

(a) Inwards - On Purchases - Direct Expense - Debited to Trading A/c

(b) Outwards - On Sales - Indirect Expense - Debited to P&L A/c

4

GP = Direct Incomes - Direct Expenses

5
= Sales - COGS
= Sales - (Opening Stock + Purchases + other Direct Exp - Closing stock)
6

8
8
 Financial Statements of Manufacturing Entities (ALSO CALLED General Purpose Financial statements) consist of the following –
(a) Manufacturing Account
(b) Trading and Profit and Loss Account,
(c ) Balance Sheet
(d) CFS

Trading Account. The format of the Trading Account is as under –

Journal Entries for Trading Account (Purpose is to Calculate Gross Profit)

Transaction Journal Entry Remarks
Purchase Returns A/c Dr. In the Trading Account, Purchases
Transfer of Purchase Returns (i.e. and Purchase Returns are shown in
Returns Outward) to Purchases A/c the inner column, and the net
To Purchases A/c amount is taken to outer column.

Sales A/c Dr.

In the Trading A/c, Sales & Sales
Transfer of Sales Returns (i.e. Returns are shown in the inner
Returns Inward) to Sales A/c column, and the net amount is
To Sales Returns A/c taken to outer column.

Trading A/c Dr.

Transfer of Opening Stock,

Purchases, Direct Exp(like Freight) to Each of these is shown as a separate
Trading A/c To Opening stock line item in the Trading Account

To Purchase A/c
To D. Exp (Freight Inwards)

Sales A/c Dr.

Sales Amount is shown in the Cr.
Transfer of Sales
Side of Trading Account.
To Trading A/c

Recording of Closing Stock in Closing Stock A/c Dr. See alternative treatments given
Trading Account below separately
To Trading A/c
Abnormal Loss A/c Dr.
Abnormal loss of goods
To Trading A/c
Transfer of Gross Profit from Trading Trading A/c Dr. If Cr. Side Total > Dr. Side Total, the
A/c to P & L A/c To P & L A/c difference is called Gross Profit

Transfer of Gross Loss, if any, from Profit & Loss A/c Dr. It Dr. Side Total > Cr. Side Total, the
Trading a/c to P & L A/c difference is called Gross Loss.
Transfer of Gross Loss, if any, from It Dr. Side Total > Cr. Side Total, the
Trading a/c to P & L A/c To Trading A/c difference is called Gross Loss.

Closed Accounts
Opened Accounts
the following –

Accounting Treatments / Disclosures for Closing Stock

There are two different methods of dealing with Closing Stock, which are explained below –

Method 1 Method 2

Description Separate Credit in Trading A/c Adjustment against Purchases A/c

Closing Stock Value is ascertained after Closing Stock Value is ascertained before preparation of Trial
Time of recording preparation of Trial Balance (TB) balance

Closing Stock does not appear in TB. It is given Closing Stock value appears in the TB itself. It is not an
Treatment in TB below the TB as an adjustment. TB includes adjustment below TB. Opening Stock will not appear in TB.
Opening Stock

The following Journal Entry is passed after The following Journal Entry would have been passed before
preparation of Trial Balance – preparation of TB –
Journal Entry
Closing stock A/c Dr. Closing Stock A/c Dr.
To Trading a/c To Purchases A/c
Treatment in Trading Closing Stock is credited to the trading A/c Closing Stock is not credited to Trading A/c, since Purchases
A/c A/c is already adjusted
Treatment in Balance Closing Stock is shown on the assets Side of Closing Stock is shown on the assets side of the Balance
Sheet the Balance Sheet, under “Current Assets” Sheet, under “Current Assets”.
To Purchases (Note 2)
To Opening Stock By Sales (calles as Adjusted
Purchases)
Display in Trading A/c To Purchases By Closing Stock To Other Items ….
To Other Items…. To Gross Profit
To Gross Profit

Notes:
1. Method 1 (crediting Trading A/c separately) is generally adopted by most entities.
2. Under Method 2, Opening Stock will also be transferred to Purchase Account, by passing the journal entry “Dr. Purchases A/c, and Cr. O
Adjusted Purchases = Purchases - Purchase Returns + Opening Stock - Closing Stock
 Method 2

t against Purchases A/c

ck Value is ascertained before preparation of Trial

ck value appears in the TB itself. It is not an

below TB. Opening Stock will not appear in TB.

ng Journal Entry would have been passed before

n of TB –

ck A/c Dr.
Purchases A/c
ck is not credited to Trading A/c, since Purchases
dy adjusted
ck is shown on the assets side of the Balance
er “Current Assets”.
By Sales
passing the journal entry “Dr. Purchases A/c, and Cr. Opening stock A/c”. Hence, the value of Purchases in such cases will effectively reflect the Cost of G
effectively reflect the Cost of Goods Sold during the period.
Profit and Loss A/c
P&L A/c for the year ended…..
Part Amt Part Amt
To Gross Loss b/d By GP b/d
(From Trading A/c) (From Trading A/c)

To Indirect Expenses A/c By Indirect Incomes A/c

Management/Adm Exp Non-Trading Income
Maintenance Exp Abnormal Gains
Selling & Dist Exp Any others
Financial Exp
Abnormal Lossess
Any others

To Net Profit (b/f) xxxx By Net loss (b/f) xxxx

(Transferred to Cap A/c) (Transferred to Cap A/c)

Balance sheet
Balance sheet as on / as at…..
Liabilities Amt Assets Amt
Capital/Equity Long term Assets / Non Current Assets
Reserves and Surplus (Incl Fixed Assets)

Long term Liab / Non Current Liab Short Term Assets / Current Assets

Short term Liab / Current Liab

Accounting Equation
Balance sheet Equation: Capital (Equity) + Liabilities = Assets
Journal Entries for P&L Account (Purpose is to Calculate Net Profit/Loss )

Transaction Journal Entry

Transfer of Gross Profit from Trading A/c Dr.
1 Trading A/c To Profit & Loss A/c
Transfer of Gross Loss, if any, P & L A/c Dr.
2 from Trading A/c To Trading A/c
P & L A/c Dr.
Transfer of Indirect Expenses to P
3 & L A/c
To Various Expenses
A/c's (individually)
Transfer of Indirect Incomes to P Indirect Incomes A/c Dr.
4 & L A/c To Profit & Loss A/c
Transfer of Net Profit from P & L P & L A/c Dr.
5 A/c to Capital A/c To Capital A/c
Transfer of Net Loss, if any, from Capital A/c Dr.
6 P & L A/c to Capital A/c To Profit & Loss A/c

Closed Accounts
Opened Accounts
 Remarks
The amount of GP is written on the Credit Side of the
P & L A/c

Gross Loss, if any, is written on the debit Side of the P

& L A/c

Each Expense is shown as a separate line item.

However, if the items of expenses are numerous, a
separate supporting schedule may be prepared.

Each Income is shown as separate line item in the P

& L A/c

If Cr. Side Total > Dr. Side Total, the difference is

called Net Profit

If Dr. Side Total > Cr. Side Total, the difference is

called Net Los.
Final Accounts Adjustments:
1) Drawings
Capital A/c Dr
To Drawings A/c

2) Int on Drawings (Income)

Capital A/c Dr
To Int on Drawings A/c

Int on Drawings A/c Dr

To P&L A/c

3) Int on Capital (Expense)

Int on Capital A/c Dr
To Capital A/c

P&L A/c Dr
To Int on Cap A/c

4) Income Tax
a) In case of Sole Prop. - Income tax will be treated as Drawings
Drawings A/c Dr
To Cash/Bank A/c

b) In case of Companies and Partnership Firms - Income Tax is Business Exp

Income Tax A/c Dr
To Cash/Bank A/c

P&L A/c Dr
To Income Tax A/c

5) Accrual Items
a) Outstanding Expense (Liability)
Expense A/c Dr
To Outstanding Expense A/c
(Expense amt is Increased)

b) Prepaid Exp (Asset)

Prepaid Exp A/c Dr
To Expense A/c
(Expense amt is Decreased)

c) Accrued/Outstanding Income or Income Receivable (Asset)

Income Receivable A/c Dr
 To Income A/c
(Income is Increased)

d) Income received in Advance (Liability)

Income A/c Dr
To Income received in Advance A/c
(Income is Decreased)

6) Abnormal Loss
Abnormal Loss A/c Dr 100
To Trading A/c (or) Purchases A/c 100

Cash/Bank/Insurance claim Receivable A/c Dr 60

P&L A/c Dr 40 (b/f)
To Abnormal Loss A/c 100

7) Closing Stock and Adjusted Purchases

Tax is Business Exp

Accrual Charts
Four Charts - are based on Accrual Concept
1) Computing Salary Exp from Salaries Paid 3
a) Salaries paid as given ( Trial Balance ) xxx
b) Add: Outstanding Salaries at the end of the year xxx
c) Less: Outstanding Salaries at the beginning of the year (xxx)
d) Less: Prepaid Salaries at end of the year (xxx)
e) Add: Prepaid Salaries at the beginning of the year xxx
f) Salary Expense for the year ( P&L A/c ) xxx

2) Computing Interest Income from Interest Receipts 4

a) Interest Received during the year as given (T/B ) xxx
xxx
b) Add: Income Receivable/Outstanding/Accrued at the End of the year
c) Less: Income Receivable at the Begining of the year (xxx)
d) Less: Income received in advance at the end of the year (xxx)
e) Add: Income received in advance at the begining of the year xxx
f) Interest Income for the year (P&L A/c ) xxx
 8)

Computing Salaries Paid from Salary Exp

a) Salary Expense for the year as given (P&L A/c ) xxx
b) Less: Outstanding Salaries at the end of the year (xxx)
c) Add: Outstanding Salaries at the beginning of the year xxx
d) Add: Prepaid Salaries at end of the year xxx
e) Less: Prepaid Salaries at the beginning of the year (xxx)
f) Salaries paid during the year (T/B ) xxx

Computing Interest Received from Interest Income

a) Interest Income for the year as given (P&L A/c ) xxx
b) Less: Income Receivable/Outstanding/Accrued at the End of the ye (xxx)
c) Add: Income Receivable at the Begining of the year xxx
d) Add: Income received in advance at the end of the year xxx
e) Less: Income received in advance at the begining of the year (xxx)
f) Interest Received during the year (Trial Balance ) xxx
Bad Debts and Provision for Bad debts (Prov for Doubtful Debts / Prov for Bad and Doubtful Debts)
Example 1: Without Provision Example 2: Without Provision
Trial Balance (Extract) Trial Balance (Extract)
Particulars Debit Credit Particulars
Debtors 10,000 Debtors
Bad Debts 500 Bad Debts

JE already recorded Final Accounts Adj / Additional information:

Bad Debts A/c Dr 500 Further/Additional Bad debts is Rs. 200
To Debtors A/c 500 JE already recorded
Solution: Bad Debts A/c Dr
JE to be recorded now (at the time of Final Accounts) To Debtors A/c
P&L A/c Dr 500 Solution:
To Bad debts A/c 500 JE to be recorded now
Bad Debts A/c Dr
Bad debts of Rs. 500 given in T/B should be debited to P&L A/c To Debtors A/c
Debtors of Rs. 10,000 given in T/B should be disclosed in B/S
P&L A/c Dr
To Bad debts A/c

Additional Bad debts of Rs. 200 is reduced from D

total Bad debts of Rs. 700 (500 + 200) should be d

Reduced Debtors of Rs. 9,800 (10,000 - 200) shou

 Example 3: With Provision
Trial Balance (Extract)
Debit Credit Particulars Debit Credit
10,000 Debtors 10,000
500 Bad Debts 500
Provision for Bad debts 600
dditional information:
d debts is Rs. 200 Final Accounts Adj / Additional information:
Provision for Bad debts to be maintained at 10%
500 Solution:
500 JE already recorded
Bad Debts A/c Dr 500
To Debtors A/c 500
200
200 JE to be recorded now
1) Provision for Bad Debts A/c Dr 500
700 To Bad debts A/c 500
700 When Provision A/c is maintained, actual Bad debts
should not be charged to P&L A/c, it should be charged to Provision A/c
of Rs. 200 is reduced from Debtors and A/c
700 (500 + 200) should be debited to P&L

s. 9,800 (10,000 - 200) should be disclosed in B/S

 PY
2019
Estimated that Bad debts might occur
Provision for Bad debts was created in PY of Rs. 600
JE for Creating/Increasing Provision
P&L A/c Dr 600
To Provision for Bad debts A/c 600
The closing balance in Provision a/c is carried forward to NY

ged to Provision A/c

 Provision for Bad debts A/c
Particulars Amt Particulars Amt
To Bad debts A/c 500 By Balance b/d (T/B) 600 Excess = 600 - 500 = 100
(Actual Bad debts given in T/B) 1000
By P&L A/c (b/f) 900 -100
(Created/Increased) 900
To Balance c/d 1000
(10,000*10%)
1500 1500

JE for Creating Provision, to be recorded now

P&L A/c Dr 900
To Provision for Bad debts A/c 900

Disclosure in Balance sheet

Assets
Debtors 10,000
Less: Provision for Bad debts -1000
9000
 Example 4: With Provision
Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Bad Debts 500
Provision for Bad Debts (Opening Bal) 600

Final Accounts Adj / Additional information:

Provision to be maintained at 0.5% on Debtors
Solution:
600 - 500 = 100 JE to be recorded now
1) Provision for Bad Debts A/c Dr 500
To Bad debts A/c 500
When Provision A/c is maintained, actual Bad debts
should not be charged to P&L A/c, it should be charged to Provision A/c
 Provision for Bad debts A/c
Particulars Amt Particulars Amt
To Bad debts A/c 500 By Balance b/d (T/B) 600
(Actual Bad debts given in T/B)
To P&L A/c (b/f) 50
(Written back or Reduced)
To Balance c/d 50
(10,000*0.5%)
600 600

JE for Writing back Provision

Provision for Bad Debts A/c 50
To P&L A/c 50

Disclosure in Balance sheet

Assets
Debtors 10,000
Less: Provision for Bad debts -50
9,950
Example 5: With Provision
Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Bad Debts 500
Provision for Bad Debts (Opening Bal) 600

Final Accounts Adj / Additional information:

Provision to be maintained at 10% on Debtors
Additional Bad debts is 200
Solution: Provision for Bad deb
JE to be recorded now Particulars
1) Bad Debts A/c Dr 200 To Bad Debts A/c
To Debtors A/c 200 (Bad debts in T/B + Additional
Bad debts)
2) Provision for Bad Debts A/c Dr 700
To Bad debts A/c (500+200) 700
To Balance c/d
((10,000 - 200)*10%)

JE for Creating Provision

P&L A/c Dr
To Provision for Bad debts A/c

Disclosure in Balance sheet

Assets
Debtors (10,000 - 200)
Less: Provision for Bad debts
 Prob No. 4
Calculation of amount to be charged to P&L A/c
Provision for Bad debts A/
Particulars Amt
To Bad Debts A/c 100,000
(Additional Bad debts now Provided)

To Balance c/d 70,000

((15,00,000 - 100,000)*5%)
Provision for Bad debts A/c 170,000
Amt Particulars Amt
700 By Balance b/d 600

By P&L A/c (b/f) 1080

(Created / Increased)
980

1680 1680

1080
1080

9,800
-980
8,820
d to P&L A/c
vision for Bad debts A/c
Particulars Amt
By Balance b/d 40,000

By P&L A/c (b/f) 130,000

(Amt tobe debited to P&L A/c
- Provision created)
170,000
9) Discount Allowed and Provision for Discount Allowed

Example 1: Without Provision

Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Discount Allowed 500

Solution:
JE already recorded
Discount Allowed A/c Dr 500
To Debtors A/c 500

JE to be recorded now
P&L A/c Dr 500
To Discount Allowed A/c 500

Discount Allowed of Rs. 500 given in T/B should be debited to P&L A/c
Debtors of Rs. 10,000 given in T/B should be disclosed in B/S
10) Commission
Case 1: Commission is on Net Profit before charging such commission
Commission = Net Profit before Commission * Rate of Commission/100
= Net Profit before Commission * R/100
Example:
Profit before Comm is 100,000
Commission is 10% on Net Profit before charging such commission
Then, Commission = 100,000*10/100 = 10,000

Case 2: Commission is on Net Profit after charging such commission

Commission = Net Profit before Commission * Rate of Commission/(100+Rate of Commission)
= Net Profit before Commission * R/(100+R)
Example:
Profit before Comm is 100,000
Commission is 10% on Net Profit after charging such commission
Then, Commission = 100,000*10/(100+10)
= 100,000*10/110 = 9,091

Note: If question is silent about Commission on Net profit before or after charging commission
Example: Commission is 10%
It should be assumed as Before charging such Commission (Case 1)

Summary of all Adjustments - ICAI SM Page no. 7.48

If appearing in T/B - One time adjustment is required in Final Accounts
Example: Closing Stock in T/B - Disclose in Balance sheet Assets side
If appearing in Final Accounts adjustment (not in T/B - JE is yet to be recorded) - It should be adjusted two times (D
Example: Closing Stock in Final Accounts adj - Trading Credit and Disclose in Balance sheet Assets side

If appearing in T/B - One time adjustment is required in Final Accounts - Where??

If any account is appearing in T/B - It will affect Final Accounts only once - either it will be in Trading or P&L or B/S
Depending on Nature of item, it will affect either in Trading or P&L or B/S
Traditional Approach
1) Nominal
Direct Exp - Freight or Purchases Trading
Indirect Exp - Salaries P&L
Direct Inc - Sales Trading
Indirect Inc - Interest Income P&L
2) Real - Balance sheet
3) Personal - Balance sheet
Example 2: Without Provision
Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Discount Allowed 500

Final Accounts Adj / Additional information:

Further/Additional Discount Allowed is Rs. 200
Solution:
JE already recorded
Discount Allowed A/c Dr 500
To Debtors A/c 500

JE to be recorded now
Discount Allowed A/c Dr 200
To Debtors A/c 200

P&L A/c Dr 700

To Discount Allowed A/c 700

Additional Discount Allowed of Rs. 200 is reduced from Debtors

and total Dicount Allowed of Rs. 700 (500 + 200) should be debited to P&L A/c

Reduced Debtors of Rs. 9,800 (10,000 - 200) should be disclosed in B/S

/(100+Rate of Commission)

r after charging commission

e recorded) - It should be adjusted two times (Debit and credit aspects) in Final Accounts
sclose in Balance sheet Assets side

unts - Where??
once - either it will be in Trading or P&L or B/S
 Example 3: With Provision (Which was Example 5 in Bad debts)
Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Discount Allowed 500
Provision for Discount Allowed (Opening Bal) 600

Final Accounts Adj / Additional information:

Provision to be maintained at 10% on Debtors
Additional Discount Allowed is 200
Solution:
JE to be recorded now
1) Discount Allowed A/c Dr 200
To Debtors A/c 200

2) Provision for D.Allowed A/c Dr 700

To D.Allowed A/c (500+200) 700

be debited to P&L A/c

isclosed in B/S
ects) in Final Accounts
 Provision for Discount Allowed A/c
Particulars Amt Particulars Amt
To Discount Allowed A/c 700 By Balance b/d (T/B) 600
(Discount Allowed in T/B + Additional
Discount Allowed )
By P&L A/c (b/f) 1080
(Created)
To Balance c/d 980
((10,000 - 200)*10%)
1680 1680

JE for Creating Provision

P&L A/c Dr 1080
To Provision for Discount Allowed A/c 1080

Disclosure in Balance sheet

Assets
Debtors (10,000 - 200) 9,800
Less: Provision for Discount Allowed -980
8,820
Example 4: With Provision
Trial Balance (Extract)
Particulars Debit Credit
Debtors 10,000
Bad Debts 500
Provision for Bad Debts(Opening Bal) 600
Discount Allowed 300
Provision for Discount Allowed (Opening Bal) 350

Final Accounts Adj / Additional information:

Provision for Bad debts to be maintained at 10% on Debtors
Additional Bad debts is 200
Provision for Discount Allowed to be maintained at 10% on Debtors
Additional Discount Allowed is 100
Solution:
JE to be recorded now
1) Additional Bad debts
Bad debts A/c Dr 200
To Debtors A/c 200

2) Additional Discount Allowed

Discount Allowed A/c Dr 100
To Debtors A/c 100
 Provision for Bad debts A/c
Particulars Amt Particulars Amt
To Bad Debts A/c 700 By Balance b/d (T/B) 600
(Bad debts in T/B + Additional
Bad debts)
By P&L A/c (b/f) 1070
(Created)
To Balance c/d 970
((10,000 - 200 - 100)*10%)
1670 1670

JE for Creating Provision

P&L A/c Dr 1070
To Provision for Bad debts A/c 1070

Provision for Discount Allowed A/c

Particulars Amt Particulars Amt
To Discount Allowed A/c 400 By Balance b/d 350
(Discount Allowed in T/B + Additional
Discount Allowed )
By P&L A/c (b/f) 923
(Created)
To Balance c/d 873
((10,000 - 200 - 100 - 970)*10%)
(or Note) 1273 1273

JE for Creating Provision

P&L A/c Dr 923
To Provision for Discount Allowed A/c 923
Note: Computation of Provision for D. Allowed to be maintained
Debtors as per T/B 10000
Less: Additional Bad debts -200
Less: Additional Discount Allowed -100
Debtors to be disclosed in B/S 9700
Less: Provision for Bad debts -970
Amt Expected to be received from Debtors 8730
Provision for Discount Allowed 873
(8,730*10%)

Balance Sheet
Assets
Debtors 9,700 7,857
Less: Prov for Bad debts (970)
Less: Prov for Discount Allowed (873)

Summary: For Calculating Closing Provision for Discount Allowed, Closing Provision for Bad debts should be deducted
uld be deducted
Unit 2: Final Accounts of Manufacturing Entities
It Includes
1 Manufacturing A/c
2 Trading A/c
3 P&L A/c - Same as in Unit 1
4 Balance sheet - Same as in Unit 1

1 Manufacturing A/c
FORMAT OF MANUFACTURING ACCOUNT
Manufacturing Account of ……… for the year ended …….
Particulars Rs. Particulars
To Direct Materials Consumed: xxx By Closing Stock of WIP
By NRV / Sale Value of Byproducts if
a) Opening Stock of Raw Materials xxx any
b) Add: Purchases of Raw Materials xxx
c) Less: Closing Stock of Raw materials (xxx)

To Direct Manufacturing Wages xxx

To Direct Expenses, if any xxx
Sub- Total Prime Cost xxx

To Production/Manufacturing/Works Overheads xxx

a) Indirect Material xxx
b) Indirect Wages xxx
c) Indirect Expenses xxx
Sub-Total Gross Factory Cost xxx

By Net Factory Cost of

To Opening Stock of WIP xxx production( Trfd to Trading A/c)
(b/f)

xxx

Direct Materials + Direct Wages + Direct Expenses = Prime Cost

Prime Cost + Production OH = Gross Factory Cost
Gross Factory Cost + Opening stock of WIP - Closing stock of WIP - NRV/Sale Value of Byproducts = Net Factory Cost

Raw Material - in Manuf A/c

SFG/WIP - in Manuf A/c
Finished Goods - in Trading A/c

2 Trading A/c
TRADING ACCOUNT OF …. FOR THE YEAR ENDED ……..
Particulars Rs. Particulars
To Opening stock of Finished Goods xxx By Sales A/c
To Manufacturing account – Cost of Production xxx By Closing Stock of Finished Goods
To Gross Profit c/d (b/f - to P & L Account) xxx
Total Total
 Cost of Production
Rs.
xxx

xxx

xxx

xxx

of Byproducts = Net Factory Cost of Production (COP)

Rs.
xxx
xxx